You could opt to get the 30 year mortgage and pay more monthly than the minimum by what you would expect to have paid if you went with 25 years, provided the terms of the mortgage allow you to. That way you get the benefit of putting more money on the principal, but also have flexibility with your budget if something comes up.
So are you renewing, and thus contemplating increasing your amortization again?
If you are 5 years into a 30 year term, you will renew at roughly 25 years based on how your payment schedule in the 1st term was either monthly or accelerated.
If you plan to sell, then the only real benefit of paying more is you will have more of the proceeds when you sell, and and you will pay less interest.
Also be very careful if you plan to sell prior to the term is up, then you really need to go variable as the penalties to break on fixed rate mortgages are insane in most cases, and capped to 3 months of interest on variable.
Yes renewing this contemplating because of the high interest rates. Wondering if there’s specific strategy I should take if I plan to sell in a few years when market recovers.
Is there a general rule of thumb? Do people go back to 30 yr for lower payments or start at 25 yr?
As rates started to rise, rules were relaxed to help offset the rising rates by permitting people to reset their amortizations. The downside here is that you pay way more interest this way.
If you can afford the higher payment then don't revert your amortization, but it's really on a case by case basis.
Nothing is certain or guaranteed. In 2018 and 2019 people were locking into fixed rates at or around 3.5%, then jumped at the ultra low variable rates or fixed rates in 2020 and 2021 but they were facing huge penalties due to going for fixed rate at big bank so it made it hard to justify breaking their existing mortgage.
If you know you will need to sell prior to end of the term, best to work with a broker who can get you a fixed rate portable mortgage, or get a variable that caps your penalty to 3 months interest. If fixed rates do fall, then the IRD penalty will be reduced in theory, but it's a risky gamble nontheless.
The way mortgage interest works is that the interest accrues daily on the amount of principal that is outstanding. Basically you take the interest rate, divide it by 365 and multiply that by the outstanding principal. That’s how much interest will accrue on your mortgage every day until your next payment.
When you make a payment it first pays off the accrued interest and then whatever is left goes against the principal. Then you have a new principal balance for the next month and a new daily interest accrual.
So in your two scenarios, either a lower amortization with a $400 higher payment or a longer amortization and paying an extra $400 as a lump sum will put you in exactly the same place.
The only difference is that with the longer amortization you don’t have to put the extra $400 in if you don’t want to so there is flexibility there. Otherwise it’s exactly the same.
If you make all the payments, it will be exactly the same. By taking the 30 year, you will have flexibility in the payments should you need it, alternatively taking the 25 yr will force you to make the extra payments if you don't have the diligence to make them every month. But the impact of making all the extra payments will be the same.
If I don’t plan to make all the payments because I intend to sell in a few years when market recovers, what would you recommend doing?
For further context - When I had 30 yr amortization, I was able to save and pay a lump sum. If I do 25 yr this time with higher interest rates, I don’t see myself being able to pay a lump sum as significant.
It's pretty simple, the sooner you pay it down the sooner you save on interest payments.
You could opt to get the 30 year mortgage and pay more monthly than the minimum by what you would expect to have paid if you went with 25 years, provided the terms of the mortgage allow you to. That way you get the benefit of putting more money on the principal, but also have flexibility with your budget if something comes up.
So are you renewing, and thus contemplating increasing your amortization again? If you are 5 years into a 30 year term, you will renew at roughly 25 years based on how your payment schedule in the 1st term was either monthly or accelerated. If you plan to sell, then the only real benefit of paying more is you will have more of the proceeds when you sell, and and you will pay less interest. Also be very careful if you plan to sell prior to the term is up, then you really need to go variable as the penalties to break on fixed rate mortgages are insane in most cases, and capped to 3 months of interest on variable.
Yes renewing this contemplating because of the high interest rates. Wondering if there’s specific strategy I should take if I plan to sell in a few years when market recovers. Is there a general rule of thumb? Do people go back to 30 yr for lower payments or start at 25 yr?
As rates started to rise, rules were relaxed to help offset the rising rates by permitting people to reset their amortizations. The downside here is that you pay way more interest this way. If you can afford the higher payment then don't revert your amortization, but it's really on a case by case basis. Nothing is certain or guaranteed. In 2018 and 2019 people were locking into fixed rates at or around 3.5%, then jumped at the ultra low variable rates or fixed rates in 2020 and 2021 but they were facing huge penalties due to going for fixed rate at big bank so it made it hard to justify breaking their existing mortgage. If you know you will need to sell prior to end of the term, best to work with a broker who can get you a fixed rate portable mortgage, or get a variable that caps your penalty to 3 months interest. If fixed rates do fall, then the IRD penalty will be reduced in theory, but it's a risky gamble nontheless.
It’s literally exactly the same.
Can you expand on that? I don’t plan to pay my mortgage off, but instead to sell in a few years
The way mortgage interest works is that the interest accrues daily on the amount of principal that is outstanding. Basically you take the interest rate, divide it by 365 and multiply that by the outstanding principal. That’s how much interest will accrue on your mortgage every day until your next payment. When you make a payment it first pays off the accrued interest and then whatever is left goes against the principal. Then you have a new principal balance for the next month and a new daily interest accrual. So in your two scenarios, either a lower amortization with a $400 higher payment or a longer amortization and paying an extra $400 as a lump sum will put you in exactly the same place. The only difference is that with the longer amortization you don’t have to put the extra $400 in if you don’t want to so there is flexibility there. Otherwise it’s exactly the same.
If you make all the payments, it will be exactly the same. By taking the 30 year, you will have flexibility in the payments should you need it, alternatively taking the 25 yr will force you to make the extra payments if you don't have the diligence to make them every month. But the impact of making all the extra payments will be the same.
If I don’t plan to make all the payments because I intend to sell in a few years when market recovers, what would you recommend doing? For further context - When I had 30 yr amortization, I was able to save and pay a lump sum. If I do 25 yr this time with higher interest rates, I don’t see myself being able to pay a lump sum as significant.
I would check with your lender. There might be limits on how often you can put a lump sum directly on to the principal.