- If you shorten your mortgage amortization term, you have less time to finish paying off your loan. As such, you will have to make higher mortgage payments regularly. This reduces the funds you have available for other things, such as education, insurance and vacations. Before making the decision to shorten your mortgage amortization period, analyze your household's expenses to ensure that you have enough income to cover the mortgage expense and other expenses.
- Making higher mortgage payments increases the risk of you not being able to afford your payments. Depending on your level of income and the payment amount, a drop in income can result in you missing mortgage payments. Missing payments can lower your credit score, making it difficult for you to obtain loans at low interest rates. If you miss several payments, your lender may even start to foreclose on your property, and you may lose your home.
- The higher payments with shortened amortization period take away the money you could otherwise invest. Depending on your investment rate of return, it may make more financial sense for you to invest your money rather than using it to make higher mortgage payments. If you have the discipline to allocate your extra funds for investments and you earn high returns, you will be better off with a long amortization period.
- With a short amortization period, you have to make a minimum amount of mortgage payment regularly. You can lower your interest expenses and pay off your mortgage quickly without incurring the risk of not being able to afford your payments by sticking with a long-term amortization and making extra payments whenever you have extra funds. This gives you the ability to gain the benefits of a short amortization period while retaining the flexibility of a long amortization period.
next post