As payments made on a mortgage are applied firstly by the lender to interest, and secondly to principal. Payments made by you over the initial period will consist almost entirely of interest, but as the principal portion of the loan is gradually reduced, and less interest accrues thereon, the payments will gradually be applied less to interest and more to reduction of principal.

Generally, in the case of first time homebuyers, who may require relatively large mortgages and who may possibly have limited budgets, the amortization period selected is 25 years.  While total monthly payments will be slightly lower over a longer amortization period, it is important to keep in mind that they will be applied almost entirely to interest for a longer period of time, the result being that much more interest in total will be paid, than if a shorter amortization period is selected.

By shortening the amortization period even slightly, you will save a significant amount in total interest paid and monthly payments will not be significantly higher.  For example, lets take a $100,000 mortgage with a 7% interest rate, amortized over 25 years.  Monthly payments of principal and interest on this mortgage will be approximately $700.00, and the total interest paid at the end of the 25-year term, in addition to repayment of the $100,000.00 principal will be $110,127.00.

By shortening the amortization period to 20 years, the monthly payment is increased by only $69.00, but the total interest charged by the lender to retire the entire debt will now be approximately $84,635.00.  The total savings in interest will be approximately $25,487.00

Even shortening the amortization period to 22 years will result in a total savings of approximately $15,486.000 as compared to a 25-year mortgage with monthly payments that are only $37.00 per month higher than those required to service the 25-year mortgage.  Even if you are not able to afford the slight extra monthly payment amount initially, what many people do not realize is that at expiry of the initial mortgage term, (or subsequent term) in addition to selecting a new term and interest rate the amortization period can also be shortened.  Even reducing the amortization period for the balance of the mortgage, after expiry of the initial term, will result in significant savings for you.