Should You Choose 25 or 30 Year Amortization?

Amortization is something that many mortgage borrowers do not put much thought into.  The ‘standard’ amortization is 25 years, and this is what most mortgages are approved with.

But is 25 years right for you?

The lowest rates are generally found with amortizations of 25 years and under. Any amortization over 25 years and up to a maximum of 30 will often be at a higher rate.  These are the only two pricing categories surrounding amortization.  You won’t get a lower rate if you select 20 years for example. The difference in rate between 25 and 30 years can be anywhere from 0.10% to as much as 0.50%, depending on your situation.

Just because you get a lower rate with a 25 year mortgage doesn’t mean that this is the best choice. Even though a mortgage with a 30 year amortization will carry a higher rate, it will generally have a lower payment. It comes down to what is most important to you.  Paying less interest…. or having a lower payment.

For example, let’s say you are purchasing a home for $800,000 with a 20% down payment and are therefore requiring a mortgage of $640,000. You are quoted 2.59% on a 5 year fixed amortized over 25 years. And 2.69% with a 30 year amortization. 

The payment on the 2.59% 25 year option would be $2,895.75 monthly.

The payment on the 2.69% 30 year option would be $2,587.40 monthly.

So even though the rate is lower on the 25 year option, the payment will be $308.35 lower per month with the 30 year.  This can have a significant effect on one’s lifestyle. The lower payment from a 30 year amortization mortgage can provide some financial relief for many. It’s great to get a lower rate, but not if it means you’re going to be struggling each month.  Every situation is different, so best to speak with a mortgage professional about your situation and go over your options to determine what might be best for you.