Mortgage Terms - Understanding Mortgages
A
Amortization
Number of fixed payments or years it takes to repay the entire
amount of the mortgage loan.
Assumption Agreement
A legal document signed by a home buyer which requires the
buyer to assume responsibility for the obligations of a
mortgage made by a former owner.
B
Blended Payments
Equal payments consisting of both a principal and an interest
component, paid each month during the term of the mortgage.
The principal portion increases each month, while the interest
portion decreases, but the total monthly payment does not
change.
C
Canada Mortgage and Housing Corporation (CMHC)
The National Housing Act (NHA) authorized Canada Mortgage and
Housing Corporation (CMHC) to operate a Mortgage Insurance
Fund which protects NHA Approved Lenders from losses resulting
from borrower default.
Certificate Of Location or Survey
A document specifying the exact location of the building on
the property and describing the type and size of the building
including additions, if any.
Certificate of Search or
Abstract of Title
A document setting out instruments registered against the
title to the property - e.g. deed, mortgages, etc
Closed Mortgage
A mortgage agreement that cannot be prepaid, renegotiated or
refinanced before maturity, except upon payment of a
prepayment penalty.
Closing Date
The date on which the sale of a property becomes final and the
new owner usually takes possession.
Conditional Offer
An offer to purchase subject to conditions. These conditions
may relate to financing, or the sale of an existing home.
Usually a time limit in which the specified conditions must be
satisfied is stipulated
Conventional Mortgage
(Fixed-rate mortgage)
A mortgage that does not exceed 75% of the appraised value or
purchase price of the property, whichever is less. Mortgage
loan insurance is usually not required for this type of
mortgage.
D
Debt-service Ratio
The percentage of the borrower's gross income that will be
used for monthly payments of principal, interest, taxes, space
heating costs and condominium fees.
Deed (Certificate of Ownership)
The document signed by the seller transferring ownership of
the home to the purchaser. This document is then registered
against the title to the property as evidence of the
purchaser's ownership of the property.
Default
Non-payment of the installments due under the terms of the
mortgage(s).
Deposit
A sum of money deposited in trust by the purchaser when making
an offer to be held in trust by the seller's agent, broker,
lawyer or notary until the closing of the transaction.
Discharge
The removal of all mortgages and financial encumbrances on a
property.
E
Equity
The interest of the owner in a property over and above all
claims against the property. It is usually the difference
between the market value of the property and any outstanding
encumbrances.
F
Fire Insurance
Before a mortgage can be advanced, the purchaser must have
arranged fire insurance. A certificate or binder from the
insurance company may be required on closing.
Firm Offer
An offer to buy the property as outlined in the offer to
purchase with no conditions attached.
Fixed Rate Mortgage
A mortgage for which the rate of interest is fixed for a
specific period of time (the term).
Foreclosure
A legal procedure whereby the lender eventually obtains
ownership of the property after the borrower has defaulted on
payments.
G
Gross Debt Service (GDS) Ratio
The percentage of gross income required to cover monthly
payments associated with housing costs. Most lenders recommend
that the GDS ratio be no more than 32% of your gross (before
tax) monthly income.
H
High Ratio Mortgage
If you don't have 25% of the lesser of the purchase price or
appraised value of the property, your mortgage must be insured
against payment default by a Mortgage Insurer, such as CMHC.
Today, with CMHC's new rules it is possible for some borrowers
to purchase a home with no downpayment.
Holdback
An amount of money required to be withheld by law by the
lender during the construction or renovation of a house to
ensure that construction is satisfactorily completed at every
stage.
I
Inspection
The examination of the house by a building inspector selected
by the purchaser.
M
Mortgage Insurance Premium
A premium which is added to the mortgage and paid by the
borrower over the life of the mortgage. The mortgage insurance
insures the lender against loss in case of default by the
borrower. Mortgage insurance is provided to the lender by CMHC or GEMICO and the premium is paid by the
borrower.
Mortgagee
The lender.
Mortgagor
The borrower.
Maturity Date
Last day of the term of the mortgage agreement.
Mortgage Life Insurance
A form of reducing term insurance recommended for all
mortgagors. In the event of the death, accidental
dismemberment or terminal illness of the owner or one of the
owners, the insurance can pay the balance owing on the
mortgage. The intent is to protect survivors from loss of
their home.
O
Open Mortgage
A mortgage which can be prepaid at any time, without penalty.
P
P.I. (Principal & Interest)
Principal and interest due on a mortgage.
P.l.T. (Principal, Interest, & Taxes)
Principal, interest and taxes due on a mortgage.
Penalty
A sum of money paid to a lender for the privilege of prepaying
a mortgage in part or in full.
Prepayment Option
The right to prepay all or a portion of the principal balance.
Prepayment charges may be incurred on the exercise of
prepayment options.
Pre-Approved Mortgage
Preliminary qualification by the lender of the borrower's
application for a mortgage to a certain maximum amount and
rate. Generally issued for a limited time only. Subject to
limitations and final approval.
Pre-payment Penalty
A fee charged by the lender when the borrower prepays all or
part of a closed mortgage more quickly than as set out in the
mortgage agreement.
Principal
The mortgage amount actually borrowed.
R
Rate (interest)
The return the lender receives for loaning you the money for
the mortgage.
Roll-over Mortgage
A mortgage loan where the interest rate is established for a
specific term. At the end of this term the mortgage is said to
"roll over" and the borrower and lender may agree to extend to
loan. If satisfactory terms cannot be agreed upon, the lender
is entitled to be repaid in full. In this case, the borrower
may seek alternative financing.
Refinance
Renegotiating your existing mortgage agreement. May include
increasing the principal or paying out the mortgage in full.
Renewal
At the end of a mortgage term, the mortgage may "roll over" on
new terms and conditions acceptable to both the lender and the
borrower. This is known as renewing a mortgage. If
satisfactory terms cannot be agreed upon, the lender is
entitled to be repaid in full. In this case, the borrower may
seek alternative financing.
S
Second Mortgage
This is usually at a higher interest rate and represents the
difference between the appraised value of the house and first
mortgage financing plus the downpayment.
Security
In the case of mortgages, real estate offered as collateral
for the loan.
T
Term
The length of the current mortgage agreement. A mortgage may
be amortized over a long period (such as 25 years) with a
shorter term (six months to five years or more). After the
term expires, the balance of the principal then owing on the
mortgage can be repaid or a new mortgage agreement can be
entered into at the then current interest rates.
Total Debt Service (TDS) Ratio
The percentage of gross income needed to cover monthly
payments for housing and all other debts and financing
obligations. The total should generally not exceed 40% of
gross monthly income.
U
Underwriting Fees
A sum of money collected by some lenders to offset expenses
incurred in the lending transaction.
V
Variable Rate Mortgage
A mortgage for which the rate of interest changes as money
market conditions change. The regular payments stay the same
for the term. However, the amount applied towards the
principal changes according to the change (if any) in the
interest rate. Also referred to as a floating rate mortgage.
Vendor Financing (Balance of Sale)
The seller sometimes takes the mortgage at a rate lower than
market rates. Most of these arrangements are not renewable nor
transferable to the next owner
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