Getting mortgage which term makes more sense?

[Matrix_dot_ca]

I am purchasing a house and deciding on which term should i go. Rate at 4% 5 yr fixed. Should i go for 30 yr amortization or 35 yr amortization but pay as 30 or 25 yr payments?

[EugW]

I am purchasing a house and deciding on which term should i go. Rate at 4% 5 yr fixed. Should i go for 30 yr amortization or 35 yr amortization but pay as 30 or 25 yr payments?
Why the new thread? Anyways, I guess it depends on your priorities and your discipline.

A lot of people simply can't force themselves to pay extra into their mortgage on such a regular basis. However, I do think it adds significant flexibility to amortize for longer periods than you actually need to, but pay what you can over that.

So in your shoes, I'd amortize over 35 years, and pay as if I were paying for a 25-year amortization, assuming the extra payment options of the mortgage allows it.

[VivienM]

I say 35... but make as many prepayments as possible. But that way, your mandatory payments are lower, so if something bad happens to your job or something... you're more likely to be able to keep making your payments.

[netwise]

Always go for 35. Make prepayments if you can at the 25 year rate. This gives you room to cut back if you must, should something come up. The reality is in almost all cases, in 20 years you should almost be done anyway, if you slowly increase your payments based on your income raising over the years.

Also, going for the longer rate lowers your debt servicing amount. If later on you're in a position to purchase a rental property, a lake property, etc, you can still easily stay under the TDSR limits (which are good limits) and manage that lifestyle, should you choose.

[Ray Oliver]

One thing to consider with the 35 year amortization is the increased CMHC fee if your down payment is < 20%.

Personally I went with the 35 year but I am increasing my payments so it is effectively 20 years. This gives me a lot of flexibility and works well with a variable rate mortgage.

[Asoul]

I went with the 35 year amort so my required payments are lower but I made sure they could set my payments as high as possible, so if something goes wrong, I could change my payment back down if I had to.

[Invincible]

Interesting concept.

There must be a drawback to this strategy? Why wouldn't everyone do this then?

[sslinn]

The small drawback that if it is an insured mortgage you will pay and extra 0.2% in mortgage insurance premiums for every five years about 25. So you will pay and extran 0.4% in premiums for a 35 year mortgage.

The huge drawback is all up to the person paying the mortgage. If you don't have the discipline to make the extra payments and keep the 35 year amortization your interest costs will be extremely high compared to at 25 year mortgage.

[Invincible]

The other drawback I see after some calculations is that in my case, I would be paying 20% over the 35yr monthly payments to meet what I would be paying monthly if amortized over 25 years. If whatever mortgage I end up going with only allows for 20% pre-payment, I have no room for increasing that payment further when my income increases. (Unless I go with a mortgage that offers 25% prepayment).

The point you brought up is noted, but will not apply to me as I'm going for a conventional mortgage.

[EugW]

The small drawback that if it is an insured mortgage you will pay and extra 0.2% in mortgage insurance premiums for every five years about 25. So you will pay and extran 0.4% in premiums for a 35 year mortgage.
Good point, but if there is a 20% downpayment there is usually no insurance at all, unless it's a big mortgage.


The huge drawback is all up to the person paying the mortgage. If you don't have the discipline to make the extra payments and keep the 35 year amortization your interest costs will be extremely high compared to at 25 year mortgage.
Yep. Despite the best of intentions, a lot of people end up treating the extra cash only as spending money, which is unfortunate.


The other drawback I see after some calculations is that in my case, I would be paying 20% over the 35yr monthly payments to meet what I would be paying monthly if amortized over 25 years. If whatever mortgage I end up going with only allows for 20% pre-payment, I have no room for increasing that payment further when my income increases. (Unless I go with a mortgage that offers 25% prepayment).

The point you brought up is noted, but will not apply to me as I'm going for a conventional mortgage.
Many banks will allow up to 20% overpayment at every payment, as well as a yearly lump sum 20% payment of the original principal amount. Other banks also offer double up payments, so you could theoretically pay twice as much every month.

[Rudee]

Always go for 35. Make prepayments if you can at the 25 year rate. This gives you room to cut back if you must, should something come up. The reality is in almost all cases, in 20 years you should almost be done anyway, if you slowly increase your payments based on your income raising over the years.

Actually, the reality is that most people have the best intentions of making pre-payments on a yearly basis, but in most cases people make a few pre-payments at most and then revert to paying just the minimum. Almost every person I know who got a 35 or 40yr mortgage a few years ago said "yeah, but I'll pay it off like a 20yr mortgage" but financial situations changed and they are paying off the minimum amount, so good intentions can only go so far. You'd be better off sticking with a 25yr or less mortgage.

[sslinn]

Find a lender that will let you increase your payments 20% and put an additional 20% of the balance down whenever you want during the year.

I have prepaid amounts between $500 and $3000 at different times over the last year.

I have the discipline and this works well for me.

[VivienM]

The small drawback that if it is an insured mortgage you will pay and extra 0.2% in mortgage insurance premiums for every five years about 25. So you will pay and extran 0.4% in premiums for a 35 year mortgage.

On a 500K mortgage, that's $1000, no?

Not exactly MUCH extra money for the added flexibility...

[sslinn]

You are correct. Not much in the big scheme of things.