Alterna - 25-year or 30-year mortgage amortization: Which should you choose?

If you’re putting 20% down on a property and taking out a conventional mortgage, you have a significant decision to make: should you go with the 25-year or 30-year mortgage? Both options have their own set of pros and cons. The best choice for you will depend on your individual financial circumstances, long-term goals, and comfort with monthly payment amounts, among other possible considerations. Here, we’ll break down the key differences to help you make an informed decision.

The mortgage amortization period and interest rate period (term) are not the same. Here is the difference:

The mortgage amortization period is the total duration of your mortgage, during which you will pay off the entire loan.
The interest rate period is a shorter timeframe, within the amortization period, where a specific interest rate is applied to your payments.

Throughout your amortization period, you will have several interest rate periods, each with potentially different rates.

Below is a side-by-side comparison of the 25-year and 30-year mortgage

Mortgage Amount: $500,000 Interest Rate: 5.5%*
	25-year amortization	30-year amortization	Advantage
Interest Costs	You would pay approximately $415,587 in interest over 25 years.	The total interest paid would be approximately $515,031.	25-year mortgage Save $99,444 in interest for this example.
Equity Build-Up	By paying down the principal faster, you build equity in your home more quickly.	With lower monthly payments, you build equity more slowly.	25-year mortgage This can be beneficial if you plan to sell or refinance your home in the future, particularly if you decide to sell within the first few years
Duration	Shorter financial commitment.	Longer financial commitment.	25-year mortgage You’ll be mortgage-free five years sooner, which can be appealing if you’re planning for retirement or other long-term financial goals.
Monthly Payments	Monthly payment would be $3,051 compared with $2,819 for a 30-year mortgage.	Spreads the loan amount over a longer period, resulting in lower monthly payments.	30-year mortgage This can be beneficial for cash flow management, allowing you to allocate funds to other expenses or investments.
Financial Flexibility	Higher monthly payments may reduce budget flexibility, potentially necessitating the use of credit to cover unforeseen expenses.	Lower monthly payments can make it easier to handle unexpected expenses or save for other financial goals.	30-year mortgage May be easier to handle unexpected costs with a lower monthly mortgage payment.

Mortgage Amount: $500,000 Interest Rate: 5.5%*
Monthly Payment	$3,051	$2,819
Interest Paid	$415,587	$515,031
Payments Made	$915,587	$1,015,031

Keywords

Mortgage Amortization