Mortgage repayment question - interest

[justtryingmybest]

I have a question about the interest payments on a mortgage. I know with mortgages you pay interest first with very little going towards the principal. My question is what happens when you re-negotiate the mortgage. Aren't you just wasting all the time you 'got ahead' getting closer to paying the principal if you switch mortgages? The new mortgage will once again be just interest?

[MortgageQueen]

I have a question about the interest payments on a mortgage. I know with mortgages you pay interest first with very little going towards the principal. My question is what happens when you re-negotiate the mortgage. Aren't you just wasting all the time you 'got ahead' getting closer to paying the principal if you switch mortgages? The new mortgage will once again be just interest?

That's a very good question JTMB.

There are some variables in that because everyone has a slightly different situation, but I'll try to answer it basically.
If you were a typical Canadian and bought a house, you would likely have bought a house with a 5 year term and a 25 year amortization. (See definition of amortization below from Investopedia)

When you then go and refinance after the 5 years are up, common sense says you will almost always move into a 20 year amortization. The rate itself will have an impact on your payment amount, but as your amortization lowers, the amount paid down on principal increases, interest amount decreases.
But if you were to refinance with a 25 year amortization, your going back to the Starting Line basically. Many people do this because it will give them a smaller "payment". Not advisable unless it's a dire need.

INVESTOPEDIA EXPLAINS 'AMORTIZATION'

1. With auto loan and home loan payments, at the beginning of the loan term, most of the monthly payment goes toward interest. With each subsequent payment, a greater percentage of the payment goes toward principal. For example, on a 5-year, $20,000 auto loan at 6% interest, the first monthly payment of $386.66 would be allocated as $286.66 to principal and $100 to interest. The last monthly payment would be allocated as $384.73 to principal and $1.92 to interest. At the end of the loan term, all principal and all interest will be repaid.

[tjthemanto]

I have a question about the interest payments on a mortgage. I know with mortgages you pay interest first with very little going towards the principal. My question is what happens when you re-negotiate the mortgage. Aren't you just wasting all the time you 'got ahead' getting closer to paying the principal if you switch mortgages? The new mortgage will once again be just interest?

If you shorten the overall amortization , to what's now left in your MTG , I think you should be fine. Most people make the mistake of going back to the original amortization term say 25 years, when they renew, change , refinance the MTG, even though they are already 2-3 yrs into their current MTG.

So maybe the NEW amortization should be 22-23 yrs, and not 25 yrs all over again. So with this shortened amortization & new lower interest rates, which you re-negotiated you should come out ahead

People will have a 5 year fixed term MTG on 25 yr amortization. At the end of the 5 yr term , instead of going for 20 yr amortization ..they take a 5 yr term - 25 yr amortization all over again

I know people who don't even know the difference between ' term ' & 'amortization' ..can you believe that ?

[MortgageQueen]

term[/B] ' & 'amortization' ..can you believe that ?

This is very common. This is why there should be mandatory financial training in schools. There's no excuse for not teaching our children this.

[tjthemanto]

This is very common. This is why there should be mandatory financial training in schools. There's no excuse for not teaching our children this.

I know they will say something like I have a 5 year MTG , no you probably have a 25 year MTG ( amortization )..you jusr have a 5 year term , which will be renewed or renogotiated at the end of it with the same lender or other.

Unless you pay it off sooner , with penalities etc . Or if its an open mortgage , then maybe be without penalties you can pay it off

I think if you just know the basics without going into detail you should be fine.

Open, Closed , Fixed , Variable, MTG Term , Amortization , 3 month penalty or IRD, posted rate/discounted rate, CMHC insurance, downpayment etc.

The main thing is :

Mortgage loan insurance ( like CMHC) is not to be confused with Mortgage life insurance ,which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate.

Mortgage Life Insurance is a pure cash cow for banks , & more often than not a regular term life insurance policy is much much better than that.