What Is Amortization?

‍Amortization is the process of paying down a loan through regular, scheduled payments. Each payment is split between two parts:

• Interest: In the early years, most of your payment goes toward interest.
• Principal: Over time, more of your payment is applied directly to reducing the amount you borrowed.

It’s also worth noting that not all lending products have amortization schedules. For example, home equity lines of credit (HELOCs) typically follow an interest-only repayment structure. That means your regular payments cover interest charges only, unless you choose to pay down the principal.

‍Mortgage Terms vs. Amortization Period

‍Two terms often used interchangeably, but which mean very different things, these are:

• Mortgage Term: The length of time your agreement with a lender is in effect. This includes your interest rate, repayment structure, and other contract details. Mortgage terms usually range from six months to five years or more.
• Amortization Period: The total length of time it will take to completely pay off your mortgage, often 25 or 30 years. While your mortgage term may expire and need to be renewed, your amortization period continues until your loan is fully repaid.

What Happens When Your Term Ends?

‍When your mortgage term ends, you have a few options:

1. Renew with your current lender.
2. Transfer your mortgage to another lender while keeping your amortization period the same.

Alternatively, you may choose to refinance, which allows you to:

• Increase your loan amount.
• Adjust your amortization period.
• Change repayment terms to better suit your goals.

Refinancing is often a useful tool when you want to access the equity you’ve built in your home.

Using Equity to Invest in Real EstateFor clients looking to purchase an investment property, refinancing can provide the funds needed for a down payment. By tapping into the equity of your existing home, you can leverage its increased value to expand your real estate portfolio.Refinancing in Today’s MarketIn slower market conditions, appraisals sometimes come in lower than expected. This can create challenges for investors who’ve already signed builder contracts, since lenders may require additional funds to cover any shortfall between the appraised value and the purchase price.Refinancing another property allows you to use home equity to fill this gap, strengthen your down payment, and keep your financing on track. This strategy helps you stay agile and protects your investment plans, even when the market shifts.Final ThoughtsUnderstanding the relationship between amortization, mortgage terms, and refinancing options is key to making confident financial decisions. Whether you’re buying your first home, refinancing for better terms, or investing in additional properties, First Financial is here to guide you every step of the way.Have questions about how this applies to your situation?

‍ Reach out to our team today - we’d love to help.

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