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Key Mortgage Terms You Should Know

General Nazarina DiSpirito 29 Sep

Here are some key mortgages terms every prospective home buyer should know.   If you have any questions about mortgage terminology, or you want to discuss what mortgage would best suit your individual circumstances, call me today!

Appraisal: a comprehensive report that determines the value of your property based on a number of valuation factors.

Adjustable-Rate Mortgage (ARM): a mortgage with a variable interest rate, which adjusts monthly, biannually, or annually. Option-arms and hybrid mortgages are also considered adjustable-rate mortgages.

Amortization: the way a loan is paid off over time in installments, detailing how much goes toward interest, and how much is paid toward principal.

Biweekly Mortgage: a mortgage where 26 half payments, or 13 full payments, are made annually.

Closed mortgage: In some cases, a closed mortgage cannot be paid off, in whole or in part, before the end of its term. In other cases, the lender may allow for partial prepayment in the form of an increased mortgage payment or a lump sum prepayment. However, any prepayment made above stipulated allowances may incur penalty charges.

Closing: the final step in the loan process when loan documents are signed in the presence of a notary, lawyer or with a title company.

Closing Costs: the amount of money that must be paid to close your loan, including lender fees and third-party charges, along with taxes and land transfer fees.

Commitment letter (or Mortgage Approval): Written notification from the mortgage lender to the borrower that approves the advancement of a specified amount of mortgage funds under specified conditions.

Compound interest: Interest calculated on both the principal and the accrued interest.

Conditional offer: An Offer to Purchase that is subject to specified conditions, for example, the arrangement of a mortgage. There is usually a stipulated time limit within which the specified conditions must be met.

Conventional Mortgage: any mortgage loan that is not insured or guaranteed by the federal government.

Credit bureau:  A company that collects information from various sources and provides credit information on a person’s borrowing and bill paying habits to help lenders assess whether or not to lend money to the person.

Credit history or Credit Report: The main report a lender uses to determine your creditworthiness. It includes information about your ability to handle your debt obligations and your current outstanding obligations.

Debt-to-Income Ratio: the ratio of monthly liabilities and housing expenses divided by the monthly gross income of the borrower.

Delinquency: Failing to make a mortgage payment on time.

Down Payment:  an upfront payment made by the home buyer toward the property purchase price, usually ranging from five to 20 percent. The remainder of the sales price makes up the mortgage loan amount.

First-Time Homebuyer: typically defined as someone who has not owned another property at any time prior to the date of the purchase, as a principal residence.

Fixed-Rate Mortgage: a mortgage with a constant interest rate that will not adjust at any point during the term of the mortgage.

Interest Only: paying just the interest portion of the mortgage payment each month.

Interest rate: The price paid for the use of money borrowed from a lender.

Mortgage Broker: an independent loan originator who works on behalf of consumers to obtain mortgage financing.  Brokers don’t represent a single bank, but rather work with numerous lenders.

Mortgage Term: the length of time you have a specified rate and type of product, usually  5 years but there are shorter and longer terms available.

Pre-Approval/Pre-Qualification: processes to determine what you can afford to ensure you can obtain mortgage financing when purchasing a property.

Prepayment penalty: This is a fee charged to borrowers who pay a loan off faster than the prescribed payment schedule. Some prepayment penalties can add up to thousands of dollars, so they’re worth asking about.

Open mortgage: A flexible mortgage that allows you to pay all or part of the principal before the end of its term.

Principal: The amount that you borrow for a loan (not including interest).

Title: A freehold title is an interest in land that gives the holder full and exclusive ownership of the land and building for an indefinite period. A leasehold title is an interest in land that gives the holder the right to use and occupy the land and building for a defined period.

Total Debt Service Ratio (TDS): The percentage of gross income that will be used for payments of principal, interest, taxes and heat (P.I.T.H.) and other debt obligations, such as car payments or payments of other loans.

Variable mortgage interest rate: Fluctuates based on market conditions.  If the rate goes up, most lenders will change your payment but this should be confirmed with each lender.

Sources:
https://www.cmhc-schl.gc.ca/en/co/buho/hostst/hostst_011.cfm

www.thetruthaboutmortgage.com/mortgagedictionary/

http://www.bankrate.com/finance/financial-literacy/22-most-commonly-used-mortgage-terms-1.aspx