Focus on Amortization

January 16, 2014

So you want to pay the least interest as possible on your mortgage? I don’t blame you.
When banks announce their quarterly profit reports in the billions of dollars it’s enough to make your blood boil.
Here we are, everyday hard working honest people and we have to fight tooth and nail for every inch on rate and fees with the bank.
The question begs to be asked how does one get ahead in the mortgage game?

The most effective way to save money is by reducing your interest cost.

That might seem really obvious but what might not be obvious is how to go about doing that.
Let me give you a little backstage pass to help you understand how a mortgage works.
First thing to understand is that mortgages are literally 3 dimensional and very dynamic.
There are three elements constantly at play which effect how much you pay for your mortgage.

  1. principal or mortgage loan amount
  2. interest rate
  3. time or amortization

The most obvious element to focus on when trying to save money is on the interest rate. Focusing on rate is a great place to start but by consistently focusing on just the rate you are never going to crush your mortgage or save any kind of significant money in interest.
Instead your focus should be on amortization. We have a strange relationship with time and it seems that underestimate the effects small consistent change makes over many years.
Let’s play a game… The game is called “WHO PAYS LESS INTEREST?”

Who pays less interest over the life of their mortgage?

Borrower A who is consistently able to negotiate a 1/2% better rate for the life of a 25 year mortgage OR Borrower B who chooses a 20 amortization?
If you chose Borrower B, 20 year amortization congratulations! You are correct.
The following is a list of savings on a 20 year mortgage of $250,000 at various interest rates.
4% 20yr amort. vs. 3.50% 25 yr amort. the savings are: $11,905 over 20 years
4.5% 20yr amort. vs. 4% 25 yr amort. the savings are: $16,272 over 20 years
5% 20yr amort. vs. 4.5% 25 yr amort. the savings are: $20,830 over 20 years
The above example shows that even if you are able to consistently arrange a low interest rate you aren’t maximizing your savings potential. It is much more powerful to concentrate on reducing your amortization which can be done by pre-paying into your mortgage.

Think of your mortgage as a 3 legged stool.

If you want to pay the least amount of interest to the bank then think of your mortgage as a 3 legged stool. Focusing on one leg and neglecting the other two is cause for an uncomfortable unbalanced seat.
In order to manage your mortgage expense there are three things you can do:

  1. Don’t over extend yourself by borrowing too much. 
  2. Negotiate a reasonably low rate.
  3. Focus on reducing your amortization by applying pre-payments

In this way you’ll successfully pay down your mortgage faster and save yourself $10,000s of dollars.
Is paying down your mortgage a goal? Let our readers know about your success story and how you are going about paying down your mortgage debt in the comments section below.
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Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.