Real Estate

Choosing between 30 or 25 year amortization

  • Last Updated:
  • Oct 2nd, 2017 1:20 pm
[OP]
Newbie
Nov 22, 2016
58 posts
33 upvotes

Choosing between 30 or 25 year amortization

So I've been offered 2 year fixed rate of 2.24% on 25 year amt or 2.29% on 30 year amt. Which one should I choose?
23 replies
[OP]
Newbie
Nov 22, 2016
58 posts
33 upvotes
If I go with 25 year amt, I pay 8092 more principal in 2 years and 748 less in interest. So that seems like quite a bit saving in interest. I'm I on the right track?
Deal Addict
Jul 29, 2006
4142 posts
971 upvotes
How much is the mortgage?

Is this for investment property or your primary residence?
[OP]
Newbie
Nov 22, 2016
58 posts
33 upvotes
60k. will be primary residence for 2years. But with the possibility of moving and therefore becoming a rental.
Sr. Member
May 3, 2013
644 posts
207 upvotes
Toronto
If you can make the payments, then choose 25 years. UNLESS you can take the extra cash flow (by choosing the 30 yr amrt) and invest it elsewhere that will net you more in-pocket cash than the 8092 principal + 748 interest within two years.
Penalty Box
Jan 13, 2017
456 posts
366 upvotes
get 30 years and get the biggest house possible and use the extra spending money to enjoy life.
at 2.29% it is practically free.
Deal Fanatic
Nov 24, 2013
6214 posts
2965 upvotes
Kingston, ON
mitchieyy wrote: 60k. will be primary residence for 2years. But with the possibility of moving and therefore becoming a rental.
60K? Not 160K, 260K, or 600K?
Jr. Member
May 8, 2014
179 posts
93 upvotes
Toronto, ON
mitchieyy wrote: 60k. will be primary residence for 2years. But with the possibility of moving and therefore becoming a rental.
You should always take the maximum amortization that you qualify for, if the rate difference is small (or even negligible in your case).

Remember, you're not forced to pay off your mortgage in 30 years if you qualify for a 30 year amortization.

There are essentially two types of amortization: real amortization i.e. what you qualify for and what is registered on title, and your principal and interest (P+I) amortization i.e. how long it will take to pay off your mortgage at the current rate and P+I.

You can take the 30 year amortization, and then immediately increase your payments to be in line with a 25 year amortization, if that's what you want. The key benefit here is that should you ever need to increase cash flow, you can always lower your payments to an equivalent of 30 years less time gone by e.g. if you make payments based on a 25 year amortization, and in 2 years want to decrease your payments, you'll be able reduce them to the equivalent amortization of 28 years (30 years less 2 years gone by). If you only took the 25 year amortization, you'll always be looking at 25 years less time gone by.

From personal experience, having that kind of flexibility can be invaluable; further, you always have the ability to renew your mortgage at the end of 2 years (keeping the 30 year amortization that you qualified for), and have another party assume your mortgage (if the bank allows it). 30 year amortizations are harder to come by, and you may find someone interested in assuming your mortgage terms.
A semi-competent prole, having worked in mortgages at a "Big Bank" for a day or two.
Deal Expert
User avatar
Aug 18, 2005
20136 posts
4676 upvotes
Burlington-Hamilton
mitchieyy wrote: So I've been offered 2 year fixed rate of 2.24% on 25 year amt or 2.29% on 30 year amt. Which one should I choose?
If you have the discipline, take the longest possible amortization, but always make extra principal payments so you're paying equal to the shorter amortization. This way, you'll have wiggle room if hard times come.

Most people do not have the discipline to actually carry this out. But RFD is not "most people".

As for myself, I set up a google calendar reminder every 2 weeks to go in and top up my payment. And I never failed to do so.
- casual gastronomist -
Deal Addict
Mar 12, 2010
1278 posts
49 upvotes
Aurora
Jucius Maximus wrote: If you have the discipline, take the longest possible amortization, but always make extra principal payments so you're paying equal to the shorter amortization. This way, you'll have wiggle room if hard times come.

Most people do not have the discipline to actually carry this out. But RFD is not "most people".

As for myself, I set up a google calendar reminder every 2 weeks to go in and top up my payment. And I never failed to do so.
Do banks still offer 30 year amortization? I averaged $64K over past two years, looking at a $300K mortgage on a $570K house, any idea if possible to get 30 year amortization?
Deal Addict
User avatar
Dec 27, 2011
3512 posts
1779 upvotes
Waterloo
Side question. What's the reason that 30 year amortizations have higher rates than 25 year?
Deal Addict
Oct 21, 2012
1412 posts
494 upvotes
Toronto
mitchieyy wrote: So I've been offered 2 year fixed rate of 2.24% on 25 year amt or 2.29% on 30 year amt. Which one should I choose?
mitchieyy wrote: If I go with 25 year amt, I pay 8092 more principal in 2 years and 748 less in interest. So that seems like quite a bit saving in interest. I'm I on the right track?
mitchieyy wrote: 60k. will be primary residence for 2years. But with the possibility of moving and therefore becoming a rental.
On a 60K mortgage the payment difference will likely only be around $30 / month. So you should make your decision based on that and the type of person you are. Can you invest money not put into the principle of a house? For many people a house is the best investment because it is a forced savings.
Over the two year period you will not be pay $8092 more in principle. That is for the lifetime of the loan which is kinda useless because rates will fluctuate. When the 2 yr term is done, you need to renegotiate the terms again and chances are the rate will be higher.
You have not listed it as an option, and rates are likely higher now, but a 4 or 5 yr term is a decent bet right now.

When you rent your decisions should change because now you are able to write off interest as an expense.

GL
Deal Guru
Feb 22, 2011
10324 posts
12845 upvotes
Toronto
mitchieyy wrote: 60k. will be primary residence for 2years. But with the possibility of moving and therefore becoming a rental.
Personally I would take 30 years. Interest on a rental property is tax deductible so if you ever rent it out you will have lower mortgage payment and the additional interest is tax deductible. You would have higher cash flow and could use the money elsewhere. Especially if you bought another place as a primary residence, you would want to pay that off faster as the interest would not be deductible.

It's almost immaterial though given the low amount of the mortgage.
Deal Addict
User avatar
Feb 10, 2007
2737 posts
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mitchieyy wrote: 60k. will be primary residence for 2years. But with the possibility of moving and therefore becoming a rental.
60k ?????
BlackJays wrote: shame has been acheived
[OP]
Newbie
Nov 22, 2016
58 posts
33 upvotes
Thanks for all the replies! Its actually 600k not 60k. I went with 30 year amt and managed to get that at 2.24 for 2 years
Deal Expert
User avatar
Aug 18, 2005
20136 posts
4676 upvotes
Burlington-Hamilton
tido88 wrote: Do banks still offer 30 year amortization? I averaged $64K over past two years, looking at a $300K mortgage on a $570K house, any idea if possible to get 30 year amortization?
I think 30 year is no longer a thing due to government changes.
- casual gastronomist -
Deal Addict
May 18, 2015
1627 posts
628 upvotes
Ottawa,Ont
Jucius Maximus wrote: I think 30 year is no longer a thing due to government changes.
You can still do 30 yr if you have 20% or more down
Deal Fanatic
User avatar
Dec 27, 2009
7344 posts
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Victoria, BC
mitchieyy wrote: If I go with 25 year amt, I pay 8092 more principal in 2 years and 748 less in interest. So that seems like quite a bit saving in interest. I'm I on the right track?
What are your prepayment options? For example, does the lender allow you to make extra payments each month? This way you can go with the 30 year and still pay as if it is the 25 year (pay extra each month) - but if you are in a tough financial situation that month you aren't forced to pay the extra.
Sr. Member
Jul 22, 2015
594 posts
194 upvotes
Ontario
If it's going to be a rental, personally I would go with a 30 year. Typically, you can increase your payments during your term if you'd like, but you can't change the amortization during your term.

Edit: also, if you plan to rent it down the road, why not get a 5 year rate? They are as low as 2.54%. In 2 years when you go to renew, you'll likely have a higher rate than that, plus lenders may add a surcharge of 0.25% for a rental property. I'd take advantage of the low rate and lock in for a longer term like 5 years.
Deal Fanatic
User avatar
Feb 2, 2014
8889 posts
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Toronto
Jucius Maximus wrote: I think 30 year is no longer a thing due to government changes.
With 20% or more down, you can go up to 35 years with some lenders.
Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative

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