Mortgage Amortization

When you borrow such a large amount of money the only way the payments become affordable is to finance over a longer period of time. For mortgages, that period of time is called the Amortization. The most common amortization for the past few decades was 25 years. That meant that a buy bought a home and intended for it to be paid off in 25 years, based on them making regular monthly payments on it. As house prices increased, the amount of the monthly payment also increased, which started to make housing unaffordable to the average family. The lending industry changed their amortizations in order to get monthly payments back down to an affordable level. While 25 had been the maximum allowed, soon 30 year, 35 year, and then even 40 year amortizations became commonplace. By extending the amortization to 40 years homeowners could purchase a home that was about 30% more expensive than if they had to take a 25 year amortization, and the monthly payments would be the same.

One of the interesting side effects of allowing consumers to be able to afford houses that were 30% higher in price was that customers purchased homes that were 30% higher in price. Just the fact that the payment stayed the same was enough to make consumers want larger, bigger, fancier, and pricier homes. This helped to push up real estate prices in many markets across North America and has been one of the reasons cited for the housing bubble which saw prices rise too rapidly and now start to drop back as the banks and the Government realizes this mistake and attempts to reverse the problem that it created.

 

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