What is the Difference Between a Mortgage’s Term and its Amortization?
A mortgage’s term is often confused with its amortization however it is important to know the difference between the two because the difference is quite significant. The mortgage’s amortization signifies the entire time period that it will take for the mortgage loan to be repaid and considered “clear title”. On the other hand, the term is the time period that you negotiate with your broker during which you agree upon a type of payment schedule, interest rate and prepayment options. One example demonstrating the relationship between the term and the amortization is a buyer who chooses to go with a 5-year term and a 30-year amortization on his/her mortgage. This means that the interest rate, payment-frequency and prepayment options will stay the same for the 5-year term, following which, the buyer will renegotiate another term with either the existing or another lender and the amortization would then be 25 years.
