Tag: Residential

Mortgage Glossary

Glossary of Mortgage Industry Terms

Navigating the mortgage process can be challenging at times. Gathering documentation, meeting with a broker, finding a reliable real estate agent, and exploring the market all take time and energy. Things can get much harder when the terms used in the mortgage industry become overwhelming.

Securing a mortgage and buying a home is one of the most significant financial decisions you will make in your lifetime. We’re here to streamline the process with ongoing support and consultation.

One of the simplest ways that we can help you, even before you take some of the bigger steps, is by providing this comprehensive glossary of mortgage terms.

TABLE OF CONTENTS

AGREEMENT OF PURCHASE AND SALESAlso known as a purchase and sale agreement or a sales and purchase agreement (SPA), this is a legal contract that outlines the obligations of all parties in a home buying transaction. Buyer interests must be protected when signing this contract. A trusted realtor can prepare the agreement of purchase and sale ahead of closing.

AMORTIZATION PERIODThis refers to the number of years that have been agreed to pay off the financing for a mortgage. Payments over the amortization period can be blended to keep them consistent.

APPRAISALA professional can inspect a home and consider its location to determine its value. The appraisal is the estimated market value of a property.

ASSETSAssets can be cash, equities, or even property owned by a borrower. These are items with tangible value that can help to secure financing.

ASSUMPTION AGREEMENTA mortgage can be transferred or “assumed” by a new party in some cases. An assumption agreement is a legal contract stipulating that the liability of the mortgage debt has been transferred to another party.

BLENDED PAYMENTSThis is a unique way of repaying a loan. Principal and interested are combined (blended) over a determined amortization period, ensuring that monthly payments are equal.

CANADA MORTGAGE AND HOUSING CORPORATION (CMHC)A Crown Corporation of the Canadian government. The CMHC facilitates and insures mortgage loans, especially high ratio mortgages that are more than 80% of the home purchase price. This organization is also responsible for administering the National Housing Act.

CLOSED MORTGAGEA type of restricted mortgage where the parties have agreed upon a locked timeframe where the loan can’t be renegotiated or paid early.

CLOSING DATEThis is the final step in a home sale. The new owner takes legal possession at the closing date.

COLLATERALIndividual items of leverage and security on a loan are referred to as collateral. Examples include equities, savings deposits, property, and vehicles.

CONVENTIONAL MORTGAGEMortgages that finance a maximum of 80% of a property’s value are known as conventional mortgages.

CREDIT SCORINGA score given to a borrower to determine creditworthiness. The process of appraisal is known as credit scoring.

DEMAND LOANA special type of loan where the lender can demand a balance to be paid in full, meeting certain conditions set out in the original agreement.

DEPOSITIn the mortgage industry, a deposit refers to the purchaser’s money that is held in trust after making an offer. The deposit is released to the seller at the closing of the sale. A buyer may forfeit the deposit if they break certain agreements negotiated with the seller.

EQUITYThe market value of a homeowner’s stake in their property. It is the difference between the home’s appraised market value and the remaining balance of the mortgage on a property. As a homeowner pays off a mortgage, equity increases.

FIRST MORTGAGEThis is the primary mortgage on a property before any second mortgages or leveraged loans. It is the original registered debt.

FIXED-RATE MORTGAGEA mortgage where an interest rate is set at signing and protected throughout the term of the mortgage.

GROSS DEBT SERVICE RATIOAlso known as GDS, this is a calculation that helps lenders to gauge affordability. Most lenders won’t extend credit if the ratio is above 32%. It is calculated by adding taxes, heating costs, maintenance fees, and mortgage payments, then dividing the total by the gross income of the borrower.

GUARANTORAnother party agreeing to repay a loan if the primary borrower defaults. A guarantor is usually needed when the primary borrower lacks a reliable credit history or income.

HIGH-RATIO MORTGAGEWhen a mortgage finances more than 80% of the property value, it is known as a high ratio mortgage. Insurance is required for this type of mortgage. Buyers can overcome high insurance costs by adding a second mortgage for the balance after signing.

HOME EQUITY LINE OF CREDITA special financial tool that allows homeowners to borrow money from the equity that they have in the home. Some programs allow borrowing up to 75% of the appraised value of a home.

INTEREST ADJUSTMENT DATEMortgage professionals recommend closing a home sale at the end of the month. This is because any interest generated before the beginning of the mortgage term is usually paid at closing. The interest adjustment date, also known as the IAD, is the first day of a mortgage term. It often falls at the beginning of a new month.

INTEREST-ONLY MORTGAGEIn some cases, a buyer may prefer to take out an interest-only mortgage for a duration of up to ten years. During this time, the buyer will pay interest but won’t build equity in the home. At the end of the term, a new amortized loan will be created. This type of structure is useful for buyers who want to make lower payments in the early years of home ownership. However, it results in higher payments once the principal is added.

MORTGAGEA mortgage is a specialized type of loan. It allows borrowers to get financing for their first home, move-up homes, or even investment properties. A mortgage is secured by the home or other property. When the mortgage is fully paid, the buyer owns all of the equity in the property.

MORTGAGEEThe lending party in a mortgage agreement is known as the mortgagee. Examples include banks, credit unions, and private lending institutions.

MORTGAGORSomeone who enters a mortgage agreement to borrow from a lender is known as the mortgagor. This is typically a home buyer.

OPEN MORTGAGEA special mortgage with a higher interest rate than a closed mortgage. The loan can be repaid at any time without any risk of penalty.

P.I.T.This term refers to the principal, interest, and tax that is initially paid with a mortgage. Buyers with higher down payments are often allowed by lenders to pay taxes independently outside of the mortgage agreement.

PORTABLE MORTGAGEA special type of mortgage rarely used by the average home buyer. It can be transferred from one property to another.

PREPAYMENT PENALTYA penalty designed to protect lenders from lost revenue. When a buyer pays a mortgage early in full or makes individual payments higher than the amortization, the lender may charge a fee that is higher than the lost interest.

PRIMEThe absolute best-case scenario for a mortgage rate. Lenders advertise prime rates, but only offer them to their most reliable customers with strong credit ratings or leverage.

PRINCIPALThe total amount of a loan, excluding interest.

RATE COMMITMENTWhen a lender negotiates a rate with a borrower, the figure is known as the rate commitment, This is locked in for an agreed period, usually ranging between one and three months. If a loan contract isn’t signed in this time, the lender may change the rate.

RENEWALAt the end of a mortgage term, the loan can be renewed or transferred (switched) to another lender. Most borrowers stay with the same lender, but some take advantage of better rates with alternative providers.

SECOND MORTGAGEAny debt beyond the first mortgage that is secured against a home or other property.

SWITCHThe process of transferring a mortgage to a new lender during the renewal period. Sometimes attracts high fees, depending on the timing and original mortgage agreement. A mortgage broker can minimize the cost of switching a mortgage.

TERMThe length of a mortgage agreement. 5-year terms are common in Canada.

TOTAL DEBT SERVICE RATIODetermines affordability. A lender will calculate a borrower’s ability to make payments on a mortgage. The total debt service ratio is calculated by comparing income to debts and outgoing expenses. To qualify for a mortgage, most borrowers need a debt service ratio below 40%.

VARIABLE RATE MORTGAGEA mortgage that can see interest fluctuations through its term. This can allow borrowers to take advantage of low rates, but may also cause a rate increase during the term.

VENDOR TAKE-BACK MORTGAGEAn uncommon type of mortgage where the seller becomes the lender, offering credit to facilitate a sale.

YOU’RE NOW PREPARED TO EXPLORE THE MORTGAGE MARKETBy understanding the essential terms in the mortgage industry, you’ll be better prepared to explore the market and find a mortgage that suits your needs. To make the process even easier, ask our brokers for help and get access to the best possible rates for all types of fixed and variable mortgages.

Your dream of homeownership can become a reality with an experienced broker working on your side.