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Unveiling the Hidden Benefits of Longer Mortgage Amortization

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Few years ago, you might have been taught that a shorter mortgage amortization is always better. Some would even reveal that shorter amortizations are the most ideal approach to home financing. Some banks would even encourage their customers to consider a shorter mortgage amortization because it means being debt-free sooner.

 

However, in various cases, shorter mortgage amortizations are not better. Longer amortizations will lower your mortgage payments that free up cash flow. For instance, you are paying 3.5 per cent on a particular mortgage, but you have a car loan at six per cent or a credit card debt at eighteen per cent. Why would you pay more than you are supposed to on your mortgage?

 

Even when you are debt free, longer amortizations still make sense. Well, the secret is, you need to earn after-tax returns on your investments that is higher than the mortgage rate you have. For instance, if you have a 3.5 per cent mortgage but you can earn 4.5 – 5 per cent on those tax-sheltered investments, such as those in tax-free savings accounts, a homeowner who is financially secured will often benefit from lengthening his or her amortization and directing those mortgage payment savings to such investments.

 

Among the many valuable principles in finance that you might have learned is the ‘time value of money’. This actually highlights the concept that the money that you have today is worth more than similar amount of money in the future. This is due to the fact that you can always make investment today to be able to obtain a return over time. This only means that is really pays more to opt for longer amortizations than the shorter ones.

 

For right borrowers in the right situation, a longer mortgage payment period can actually be a great strategy that anyone can consider.

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