I've heard first time buyers being
advised to stay away from long amortizations, Why. It is because
the interest you pay is way too high and it is not a good idea I'm
told. Once again I go back to the simple plan....What is best for
YOU.
Lets look at the upside and down side......
Sceptics will be pleased that I agree the
interest paid over a 40 year compared with 25 year is not a good
strategy. However, is this what people do, get one mortgage and pay
it off as per the original amortization.....No. You are likely to
sell and purchase or refinance in less than 10 years.
The reason the longer term amortization is becoming more popular is
obviously lower monthly payments and therefore allows you to
qualify for a larger mortgage and home purchase. There is a price
for this, on high ratio every 5 years greater than 25 year
amortization costs .20%. This is added to the Insurance premium and
added to the mortgage amount. So no upfront cost but added
cost/loss of equity. On conventional there is typically no cost but
could be limited to 35 years in some cases.
If you used the Accelerated Bi Weekly
payment option on a 40 am you would be left with an effective
amortization of 30.5 years. What this means is that the 25 year
mortgage takes 25 years and the 40 year with Bi weekly will be paid
off in 30.5 Years. It is more common that a monthly payment
strategy is chosen simply for the fact it is the cheapest. If you
want to pay down your mortgage as fast as possible you will not be
looking at a 40 year am.
Here is an interesting scenario, take the money you save with
longer am..invest it in lets say RRSP's.. receive tax break and
increase in value...check in 10 years...which makes more sense??
Buy more house with a longer amortization...wait 10
years..calculate interest loss versus appreciation of house value(
difference longer am allowed for purchase)???
The skinny is they have an upside and a downside, what is important
is what makes sense to you.
