What’s the difference between “amortization” and “term”?

There are many stresses associated with home buying –
both financial and emotional. And frankly speaking, it
doesn’t help that the process comes with its very own
foreign language. While your mortgage professional
can help de-mystify these terms, it helps to have a bit
of a primer on what some of these terms mean. After all,
it’s your money and your home we’re talking about.
As a mortgagor, you have a right to understand what
you’re reading.

We'll start with “amortization” and “term”. Both refer to
periods of time in the life of your mortgage, and you’ll
want to be sure that you understand the difference.

The “amortization” of your mortgage is the length of
time that would be required to reduce your mortgage
debt to zero, based on regular payments at a specified
interest rate. The amortization period is typically 15, 20
or even 35 years, although it can be any number of
years or part years. You could establish that you are
able to make a certain payment each month of say
$950. for your $130,000. mortgage at 5.5%. In this
case, your amortization period will be just under 18
years. Or you could tell your mortgage professional that
you’d like to be mortgage-free in just 10 years. With an
amortization period of 10 years at the same interest rate,
your $130,000. mortgage will cost you about $1,407.
per month. That’s a tougher monthly payment, but you
would save thousands of dollars in interest more than
$35,000, in fact! As you arrange your mortgage, keep
in mind that your amortization period may be fairly long
– although the shorter you can make it, the less you’ll
wind up paying for your home in the long term.

The “term” of your mortgage will typically be shorter.
The “term” is the duration of your mortgage agreement,
at your agreed upon interest rate. This will be a very
specific length of time, although you will have several
choices. A 6-month mortgage is a very short-term
mortgage. A 10-year mortgage will be one of the
longest terms, generally with a higher rate of interest
to represent the higher degree of uncertainty in the
economic outlook. After your mortgage term expires,
you will need to either pay off the balance of the
mortgage principal, or negotiate a new mortgage
at rates that are available at that time.

Now, back to the term “mortgagor”. This is one
of three very similar terms: “mortgagee”, “mortgagor”,
and “mortgage”. A mortgagee is the lender of the
money: a bank, company, or individual. A mortgagor is
the borrower: the person or persons (or company) that is
borrowing the money and who will pay it back to the
mortgagee. The mortgage, of course, is the legal document
that pledges the property as a security for the debt.
Still confused? For further information speak with a
mortgage professional. Get the best mortgage suited to
your specific needs and all of your questions answered
in plain talk.