Mortgage Terms And Definitions
Adjustable Rate Mortgage
In an adjustable rate mortgage, the interest rate and monthly payments fluctuate based on market interest rates. As the interest rate adjusts up or down, payment amounts adjust accordingly so that the amortization period remains the same. This method should be used carefully, as changes in payment amounts could present an issue for those on a tight budget.
This is the period of time that it will take for you to repay your mortgage in full, typically ranging from 15 to 25 years. A longer amortization period will result in lower payments, but you’ll also end up paying more in interest over the length of the mortgage. A shorter period results in less interest paid as well as higher payments. It’s wise to choose the shortest amortization period you can afford.
Assets and Liabilities
Assets include your checking and savings account balances, RRSP and investment balances, vehicles, and property you own. Your liabilities may include other mortgage, credit card debt, and outstanding loans. When you apply for a mortgage, your assets (less your liabilities) are taken into account to determine whether you can afford your monthly payments.
Bridge financing is a form of credit that bridges the time between when you need financing and when long-term financing can be secured. Often used as funding between the sale of one property and the purchase of another, this short term solution is best used with the help of a professional mortgage broker.
Cash Back Mortgage
A cash back mortgage is an option, used in fixed rate mortgages, that offers the buyer a lump sum of cash at the time of their closing. This method is especially helpful in covering the expenses of moving, lawyer’s fees, or even renovations to your new home.
A closed mortgage sets a limit on the amount and frequency at which you may make lump sum payments. In this case you may be charged a penalty should you choose to pay off your mortgage prior to the end of your term (for example, if you sell the home). However, a closed mortgage offers fixed payments and longer amortization periods, so that homeowners don’t have to worry about unexpected changes to their monthly expenditures.
A commercial mortgage is secured using real estate as collateral.
A construction mortgage is secured by real estate. This type of mortgage is used to fund the construction or renovation of buildings on the property.
This common type of mortgage loan does not exceed 80% of the property value (the lesser of the purchase price or the appraised value). For this type of mortgage, you must have a minimum of 20% for a down payment.
Your credit score is a number that represents your creditworthiness. There are two agencies offering credit reports in Canada, Equifax and TransUnion, and you may order a free copy of your credit report as many times per year as you’d like, provided you make the request in writing. Your credit score will impact which mortgage products you qualify for and what interest rate you can obtain.
A customized mortgage is simply a mortgage loan that doesn’t meet conventional criteria. Customized mortgage loans include cash back, zero-down, tax deductible and more.
Debt Consolidation Loan
A debt consolidation loan combines several types of debt and allows you to make one monthly payment, rather than many.
This is the amount of money that a homebuyer must have available to secure a mortgage, generally ranging from 5%-25% of the purchase price.
In a fixed rate mortgage, the interest rate is fixed for a specific amount of time. This period of time (the mortgage term) can range anywhere from 6 months to 10 years. Over the course of the mortgage, less of the payment counts toward interest, and more toward the principal.
A HELOC, or Home Equity Line of Credit, can be your only loan against your home, or can function as a second mortgage. A HELOC works similar to a personal line of credit. In order to obtain a HELOC, the homeowners much have at least 35% of equity in their home.
A high-ratio mortgage is one that is more than 80% of the home’s value (the lesser of purchase price of appraised value), up to 95%. This type of mortgage must be insured against borrow default. The insurance premium may be added to the loan or paid in advance.
This is the cost of borrowing money for a period of time. Interest is typically paid to the lender in installments along with the repayment of the principal loan amount.
This is the rate at which you pay interest, calculated as a percentage of the principal amount, charged by the lender. In Canada, interest rates on mortgages are compounded twice per year.
Investment Property Mortgage
An investment property mortgage is specialty financing that helps facilitate real estate investment. Typically, terms for investment property mortgage are different than those for traditional mortgage properties, so it’s wise to work with a mortgage broker when obtaining this type of mortgage.
Leasing is a way to obtain use of a property for a specific period of time. Essentially, a lease is a contract between an owner and a renter, sometimes with the option to purchase the property at the end of the lease period.
The maturity date is the end of the mortgage term. At this time you may choose to repay the balance of the principal or renegotiate the mortgage using current interest rates.
A mortgage is a type of loan that uses the home you buy a security. A mortgage loan is a legal document against the title of your property.
A mortgage broker is an intermediary between a borrower and a lender. This person must be a Licensed Mortgage Associate for at least two years before becoming a Mortgage Broker.
Mortgage insurance is required by the lender on a high-ratio mortgage. In the event that a borrower defaults on their loan, mortgage insurance protects the lender. There are three mortgage insurers in Canada: AIG, Canadian Mortgage and Housing Corporation (CMHC), and Genworth.
Mortgage Life Insurance
This type of insurance will pay a mortgage off in full should the homeowner die or become disabled. You may choose to add the insurance premium to your monthly mortgage payments.
These are ways to tailor your mortgage to fit your unique needs and circumstances. A few common mortgage options include open and closed mortgages, pre-payment options, fixed or variable rates.
An open mortgage allows the homeowner the option to pay off their entire mortgage or make large lump sum payments without penalties or additional fees. An open mortgage may be a good choice for homeowners who plan on selling their home soon or require a shorter mortgage term. Because an open mortgage comes with a shorter term, it typically also comes with a higher interest rate.
This is the frequency at which the homeowner makes their mortgage payments. Payment options include monthly, semi-monthly (twice a month), bi-weekly (every other week), and weekly payments. More frequent payments generally results in lower interest costs over the life of your mortgage and can shorten your mortgage term significantly.
Should a homeowner decide to move, a portable mortgage allows the homeowner to carry over their current mortgage conditions to their new home.
Mortgage pre-approval qualifies an individual for a specific loan amount before he or she begins to look for houses, based on how much money the lender is willing to lend to the borrower. It also guarantees their mortgage at the current interest rate for a period of 120 days.
Pre-payment is when the homeowner pays off the remainder of their mortgage before the term is up.
Certain mortgage products penalize the homeowner for paying off their mortgage early. Typically, the penalty is equal to three months of interest or the interest rate differential.
Certain mortgage products allow the homeowner to make mortgage payments on top of their regular mortgage payments without a penalty. These additional payments may include doubling up on a monthly payment, increasing monthly payments, and paying off part of their mortgage principal up to a certain percentage.
The principal is the amount the of mortgage loan, not including interest.
A private mortgage is offered by a privately-owned corporation or an individual, as opposed to a conventional lender.
Refinancing a mortgage is to pay off an existing mortgage and arrange a new mortgage, often with a different lender.
A reverse mortgage is designed for individuals 60 years and older. This type of mortgage gives the homeowner a lump sum of cash. In exchange, the homeowner gives a mortgage to the lender for up to 40% of their home equity.
A second mortgage is an additional mortgage on a property that is already mortgaged.
A self-employed mortgage is specially designed for entrepreneurs who cannot prove their income in the traditional way.
Sources of Down Payment
Homebuyers may make their down payment from a variety of sources, including but not limited to:
- Borrower’s savings
- RRSO withdrawal
- Gifted funds from family
- Proceeds from the sale of another property
- Funds borrowed against proven assets
- Sweat equity
- Cash back from lender
- Borrowed funds
Tax Deductible Mortgage
A tax-deductible mortgage uses your mortgage payments to generate tax refunds. There are several techniques to accomplish this type of mortgage that are best used with the help of an experienced mortgage broker.
A mortgage term is the length of time for which a mortgage agreement exists between a borrower and a lender. Mortgage terms generally range anywhere from 6 months to 10 years. This is the period of time an interest rate is fixed, after which the borrower must either repay the remaining balance or renegotiate with the lender.
A variable rate mortgage is one in which payments are fixed, but the interest rate will fluctuate with changes in the Prime Rate. When rates go up, a larger portion of the payment goes toward interest. When rates go down, more of the payment goes toward principal.
Borrowed Down Payment
Borrowed down Payment or Flex Down Payment is a way for an individual to buy a home using borrowed money.