GuidesTerms
Term, rate and commitment period
The difference between term, amortization and rate period.
The term: the length of the current contract
The amortization: total time to repay
The rate: set for the length of the term
Three separate ideas
- The term: the length of the current contract
- The amortization: total time to repay
- The rate: set for the length of the term
Choosing the term length
A short term lets you renegotiate sooner. A long term fixes the payment longer.
Why the three get confused
A loan amortized over twenty-five years renews several times along the way.
Each renewal opens a new term, at a new rate.
Common terms
- One year, to keep flexibility
- Three years, a frequent compromise
- Five years, the most common
- Ten years, rare and costlier
End-of-term risk
Loans all maturing in the same year expose you to the same market.
Staggering maturities
If you own several properties, spread the maturity dates.
That avoids renewing your entire portfolio in one year.
This precaution costs little and guards against a sudden increase.
What stays fixed and what changes
The amortization follows the loan until it is fully repaid.
The rate and the term are renegotiated at each maturity.
This distinction explains why a twenty-five-year loan is signed several times.
