Term and Amortization: Two Words People Mix Up

Mortgage paperwork is full of unfamiliar language, and these words cause more confusion than most. Both describe a length of time and they often appear side by side, but they mean quite different things.

Amortization: the life of the loan

Your amortization is the total length of time it would take to pay the mortgage off completely, assuming you make every regular payment and nothing else changes. The lender uses it, along with your rate and the amount you borrow, to work out your regular payment.

Term: the contract you're in right now

Your term is the length of your current mortgage contract. It sets how long your interest rate, or the way your rate is calculated, and the rest of your conditions stay in place. Terms run from a few months to several years, and they're usually much shorter than the amortization.

When a term ends, whatever you still owe comes up for renewal. You can usually renew with the same lender, move the mortgage elsewhere, change it or pay it off. So most mortgages are repaid over a series of terms, each with its own rate and conditions, inside a single amortization.

What changes when the amortization is shorter or longer

A shorter amortization means higher regular payments, because you're repaying the same amount in less time. In exchange, you pay less interest over the life of the mortgage and build equity sooner. A longer amortization lowers each payment and leaves more room in the monthly budget, but interest is charged over a longer period, so the total cost of borrowing is higher.

How long an amortization you can have depends on the rules in force when you apply, your down payment and the lender, so ask what applies to you.

What changes when the term is shorter or longer

A shorter term brings you back to renewal sooner. That gives you more frequent chances to make changes, and it also means your rate is reset more often, for better or worse. A longer term keeps your rate, or the way it's calculated, and your conditions in place for longer. The trade-off is less flexibility: if you need to leave a closed mortgage before the term ends, a prepayment charge usually applies, and how it's calculated depends on your contract.

A related wrinkle: depending on the product, a variable-rate mortgage either changes your payment when rates move, or keeps the payment the same and changes the share going to principal. Where the payment stays the same, the time left to repay can stretch or shrink as rates move.

How they work together

Each renewal is a natural time to look at both. You can keep the amortization on track, shorten it with higher payments or prepayments, or ask whether lengthening it is possible, which often means qualifying again. Neither choice is right for everyone.

If you'd like us to walk through how term and amortization would play out in your situation, we're happy to have that conversation.