Amortization

Definition

The theoretical period needed to repay the loan in full, for example 25 years. It should not be confused with the term, which is the length of the current agreement. A longer amortization lowers the payment but increases total interest. Example: $400,000 at 4.5%. Over 25 years, the payment is about $2,210 a month and total interest about $263,000. Over 30 years, the payment drops to about $2,015, but total interest climbs to about $325,000. At renewal, the remaining amortization keeps shrinking; an offer that resets it to 25 years eases the payment by pushing back the end of the loan. On an insured loan the maximum is generally 25 years, with recent exceptions for some first-time buyers and new builds; above 20% down, 30 years is common.