The amortization period on a mortgage is the total length of time it will take you to pay off your mortgage. If your down payment is less than 20 percent of the purchase price of your home, the longest amortization period allowed is 25 years. Longer amortization periods are allowed for non-insured mortgages of 30 to 35 years, and - with some specialty loan products - interest-only payments are available.
Although a longer amortization period means lower mortgage payments, it may be to your advantage to choose the shortest amortization period—that is, the largest mortgage payments—that you can comfortably afford if your goal is to pay off your mortgage faster. Requesting a shorter amortization period will save thousands or even tens of thousands of dollars in interest in the long run.
In the following example*, notice the relationship between total interest paid, the monthly payment obligation, and the amortization period. Simply put, the more you pay per year, the faster your loan is repaid /amortized and the less you pay in interest.
* interest rate is 4.5%
I also want to relate amortization to your mortgage pre-payment privileges. Rough math in the example says your annual payments would total about $13,000 for a loan setup with a 25 year amortization. Now imagine that - In addition to your regular payments - you were able to make some extra lump-sum payments (tax returns, dedicated savings, etc) and switched to accelerated-bi-weekly payments, all such that your total payments were closer to $24,000 each year. Voila - your mortgage would be amortized (re-paid) in 10 years instead of 25. That's pretty cool.
There are circumstances where setting longer amortization periods might make sense:
For a moment, consider the situation where there is an affordable older house that you want to purchase. The condition is fair at best as it needs quite a bit of TLC (tender-loving-care), but heck it's affordable! Here's the thing, a mortgage lender is going to set the amortization period such that your loan is repaid BEFORE the house falls down. In fact. most lenders want the entire loan repaid 5 years before the home is expected to expire. How do they enforce that? Whenever property condition is in question, an appraiser is dispatched to determine the Remaining Economic Life or "REL" of the property. For a 25-year amortization loan, the REL needs to be 30 years or higher. A home with a REL=15, would have to be repaid / amortized over 10 years, and so on. So in effect, the affordable house is not so affordable after all as the REL dictates a shorter/faster amortization period, which in turn drives up the required monthly payment, say from $1000/mo (25 yr AM) to $2000/mo (10 yr AM).