What is the difference between Term and Amortization?

The "term" of the mortgage should not be confused with the "amortization". The amortization of the mortgage refers to the entire length of time that it will take for the mortgage to be paid and the house to be "free and clear". The term is the period for which your current payment obligations are valid. In other words, you may choose a five-year term and a 25-year amortization. This would mean that your interest rate, your payments, and your pre-payment options would be the same for the next five years. At the end of these five years you would re-negotiate the term, and the amortization would now be 20 years. Fixed rate Mortgages can be "closed" or "open".

Open Mortgages

Allow one to pre-pay some or all the outstanding mortgage obligation at any time, without penalty. Generally, open mortgages have a six-month and a one-year term option with higher interest rates than closed mortgages of the same term length.

Closed Mortgages

Generally, closed mortgages are offered with terms ranging from six months to ten years. Generally, closed mortgages offer more stringent pre-payment options subject to various pre-set regulations. For most people, such pre-payment options can be vital to reducing the amortization of the mortgage and should be properly discussed with the lender/agent.