Term vs Amortization
I need help understanding the difference between term and amortization.
The way I understand it after doing research is that the “term” is the period of time where you are committed to the terms and conditions (including interest rate) of your original lender.
The amortization is the period of time where you are actually paying off the loan, where your initial payments are interest heavy and your final few payments are principal heavy.
So if you have a 30 year fixed rate mortgage, then both your term and amortization period are 30 years, right?
My confusion comes from my research, where many people are saying that it is most common to have a 5 year term and 25 year amortization period. Are these people referencing ARMs?
Thanks for the help!
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#1 Foreclosures Contributor
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- West Palm Beach, FL
No. They are commercial loans which have a 30 year amortization with a Balloon at 5 years...hence the 5 year “term”.
@John Paul Whaley Term is when the balloon payment is due.
a 5/25 means the interest rate is fixed for the first 5 years and the loan is amortized over 25 years. At the end of the 5 years, you will have a balloon payment of whatever the balance is at that time.
But you still owe mortgage payments over the first five years during the “term”, correct?
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@John Paul Whaley Where are you located? In Canada, all of the mortgages have both. So a 25 year mortgage would be 25 year amortization (the total length of time to pay off the mortgage) and often 5 year terms. With that, every 5 years, you renew your mortgage with the bank at the current interest rate. Over time you pay down the principle.
"Term" is when the final payment is due.
"Amortization" is the process of paying it down.
A vanilla 30yf will have a term of 30 years, with payments that amortize over 30 years, so that your final payment is due exactly when the loan is done amortizing. If you're just doing this, you can treat the two words as synonyms for all practical intents and purposes.
HELOCs that are i/o for 10 years, and then switch to 20 year amortizations, have 30 year terms. Only the last 20 years is amortized. The first 10 is interest only, i.e. non-amortizing.
Others mentioned balloon payments. A loan might have a 30 year amortization schedule with a balloon due in 7 years. So you make payments as if it's a 30 year loan, but then on year 7 your final payment - for the full then-outstanding balance - is due. 7 year term, amortized over 30.
term is the number of payments in the contract of the loan. Amortization is the number of payments in the loan pmt calculation. If they match the loan pays to zero at the end of the loan. If they don’t you get a lower pmt but will have a balloon pmt at the end of the term and will have to come up with a bunch of cash or refinance before.