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/information makes the difference/
Mortgage Basics
What is a mortgage?
A mortgage is a loan that uses a property as security to
ensure that the debt is repaid. The borrower is referred to
as the mortgagor, the lender as the mortgagee. The actual
loan amount is referred to as the principal, and the
mortgagor is expected to repay that principal, along with
interest, over the repayment period (amortization) of the
mortgage.
A mortgage can be used for financing many different
things, including:
*Purchasing or constructing a new home
*Purchasing an existing home
*Refinancing to consolidate debts
*Financing a renovation
*Financing the purchase of other investments
*Financing the purchase of investment property
Since a mortgage is a fully secured form of financing, the
interest you pay is usually less than with most other types
of financing. Many people use the equity in their homes to
finance the purchase of investments. Using a Secured Line of
Credit, or a fixed-rate mortgage, the interest costs are
lower, and they can even write off those interest costs
against their taxable incomes.
SIMPLE GLOSSARY OF MORTGAGE TERMS
A
Agreement of Purchase and Sale:
The legal contract a purchaser and a seller go into. We
recommend that you have your offer prepared by a
professional realtor that has the knowledge and experience
to satisfactorily protect you with the most suitable clauses
and conditions.
Amortization Period:
The number of years it takes to repay the entire amount of
the financing based on a set of fixed payments.
Appraisal:
The process of determining the value of a property.
Assets:
What you own or can call upon. Often used in determining net
worth or in securing financing.
Assumption Agreement:
A legal document signed by a buyer that requires the buyer
assume responsibility for the obligations of an existing
mortgage. If someone assumes your mortgage, make sure that
you get a release from the mortgage company to ensure that
you are no longer liable for the debt.
B
Blended Payments:
Equal payments consisting of both an interest and a
principal component. Typically, while the payment amount
does not change, the principal portion increases, while the
interest portion decreases.
C
Canada Mortgage and Housing Corporation (CMHC):
CMHC is a federal Crown corporation that administers the
National Housing Act (NHA). Among other services, they also
insure mortgages for lenders that are greater than 80% of
the purchase price or value of the home. The cost of that
insurance is paid for by the borrower and is generally added
to the mortgage amount. These mortgages are often referred
to as "Hi-Ratio" mortgages.
Closed Mortgage:
A mortgage that cannot be prepaid or renegotiated.
Closing Date:
The date on which the new owner takes possession of the
property and the sale becomes final.
Conventional Mortgage:
A mortgage up to 80% of the purchase price or the value of
the property. A mortgage exceeding 80% is referred to as a
"Hi-Ratio" mortgage and the lender will require insurance
for that mortgage.
Collateral:
An asset, such as term deposit, Canada Savings Bond, or
automobile, that you offer as security for a loan.
Credit Scoring:
A system that assesses a borrower on a number of items,
assigning points that are used to determine the borrower's
credit worthiness.
D
Demand Loan:
A loan where the balance must be repaid upon request.
Deposit:
A sum of money deposited in trust by the purchaser on making
an offer to purchase. When the offer is accepted by the
vendor (seller), the deposit is held in trust by the listing
broker, lawyer, or notary until the closing of the sale, at
which point it is given to the vendor. If a house does not
close because of the purchaser's failure to comply with the
terms set out in the offer, the purchaser forgoes the
deposit, and it is given to the vendor as compensation for
the breaking of the contract (the offer).
E
Equity:
The difference between the market value of the property and
any outstanding mortgages registered against the property.
This difference belongs to the owner of that property.
F
First Mortgage
A debt registered against a property that has first call on
that property.
Fixed-Rate Mortgage:
A mortgage for which the interest is set for the term of the
mortgage.
G
Gross Debt Service (GDS.) Ratio:
It is one of the mathematical calculations used by lenders
to determine a borrower's capacity to repay a mortgage. It
takes into account the mortgage payments, property taxes,
approximate heating costs, and 50% of any maintenance fees,
and this sum is then divided by the gross income of the
applicants. Ratios up to 32 % are acceptable.
Guarantor:
A person with an established credit rating and sufficient
earnings who guarantees to repay the loan for the borrower
if the borrower does not.
H
Hi-Ratio Mortgage:
A mortgage that exceeds 80% of the purchase price or
appraised value of the property. This type of mortgage must
be insured. To avoid the cost of the insurance, a 1'st
mortgage up to 80% is arranged and a 2'nd mortgage for the
balance (up to 100% of the purchase price).
Home Equity Line of Credit:
A personal line of credit secured against the borrower's
property. Generally, up to 80% of the purchase price or
appraised value of the property is allowed to be borrowed
with this product.
I
Interest Adjustment Date (IAD):
The date on which the mortgage term will begin. This date is
usually the first day of the month following the closing.
The interest cost for those days from the closing date to
the first of the month are usually paid at closing. That is
why it is always better to close your deal towards the end
of the month.
Interest-Only Mortgage:
A mortgage on which only the monthly interest cost is paid
each month. The full principal remains outstanding. The
payment is lower than an amortized mortgage since once is
not paying any principal.
M
Mortgage:
A mortgage is a loan that uses a piece of real estate as a
security. Once that loan is paid-off, the lender provides a
discharge for that mortgage.
Mortgagee:
The financial institution or person (lender) who is lending
the money using a mortgage.
Mortgagor:
The person who borrows the money using a mortgage.
O
Open Mortgage:
A mortgage that can be repaid at any time during the term
without any penalty. For this convenience, the interest rate
is between 0.75-1.00% higher than a closed mortgage. A good
option if you are planning to sell your property or pay-off
the mortgage entirely.
P
P.I.T.:
Principal, interest, and property tax due on a mortgage. If
your down payment is greater than 20% of the purchase price
or appraised value, the lender will allow you to make your
own property tax payments.
Portable Mortgage:
An existing mortgage that can be transferred to a new
property. One would want to port their mortgage in order to
avoid any penalties, or if the interest rate is much lower
than the current rates.
Prime:
The lowest rate a financial institution charges its best
customers.
Prepayment Penalty:
A fee charged a borrower by the lender when the borrower
prepays all or part of a mortgage over and above the amount
agreed upon. Although there is no law as to how a lender can
charge you the penalty, a usual charge is the greater of the
Interest Rate Differential (IRD) or 3 months interest.
Principal:
The original amount of a loan, before interest.
R
Rate Commitment:
The number of days the lender will guarantee the mortgage
rate on a mortgage approval. This can vary from lender to
lender anywhere from 30 to 120 days.
Renewal:
When the mortgage term has concluded, your mortgage is up
for renewal. It is open at this time for prepayment in part
or in full, then renew with same lender or transfer to
another lender at no cost (we can arrange).
S
Second Mortgage:
A debt registered against a property that is secured by a
second charge on the property.
Switch:
To transfer an existing mortgage from one financial
institution to another. We can have this arranged for you at
no cost to you.
T
Term:
The period of time the financing agreement covers. The terms
available are: 6 month, 1,2,3,4,5,6,7,10 year terms, and the
interest rates will be fixed for whatever term once chooses.
Total Debt Service (TDS) Ratio:
It is the other mathematical calculations used by lenders to
determine a borrower's capacity to repay a mortgage. It
takes into account the mortgage payments, property taxes,
approximate heating costs, and 50% of any maintenance fees,
and any other monthly obligations (i.e. personal loans, car
payments, lines of credit, credit card debts, other
mortgages, etc.), and this sum is then divided by the gross
income of the applicants. Ratios up to 40 % are acceptable.
V
Variable-Rate Mortgage:
A mortgage for which the interest rate fluctuates based on
changes in prime.
Vendor Take Back (VTB) mortgage:
A mortgage provided by the vendor (seller) to the buyer.
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