Mortgage Terminology


Sometimes understanding the terminology is harder than getting a mortgage! We hope this guide will help you.


AMORTIZATION PERIOD:

The time over which all regular payments would pay off the mortgage (the life of the loan). This is usually 25 years for a new mortgage.

APPRAISED VALUE:

An estimate of the market value of the home (and property) by a qualified Appraiser.

BLENDED PAYMENT:

A mortgage payment that contains both the interest and principal. The payment stays the same throughout the term, although the interest portion decreases as the principal portion increases.

BUILDING INSPECTION:

The examination of the house by a qualified building inspector selected by the purchaser.

BUILDING PERMIT:

A certificate issued by a municipality to the owner/contractor prior to any building being erected or repaired.

CLOSED MORTGAGE:

A mortgage agreement which may or may not provide for prepayment prior to maturity. A lender may permit prepayment under certain circumstances but will levy a prepayment charge for doing so.

CLOSING COSTS:

All of the fees and expenses associated with, and due on the closing date, such as legal fees and disbursements (eg. prepaid property taxes, condo fees, real estate fees).

CLOSING DATE:

The date on which the sale of a property becomes final and the new owner takes possession.

CMHC OR GENWORTH INSURANCE PREMIUM:

Mortgage insurance insures the lender against loss in case of default by the borrower, therefore allowing for a lower down payment by the borrower. Mortgage insurance is provided to the lender by CMHC or Genworth and the premium is paid by the borrower.

CONDITIONAL OFFER:

An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. There is usually a stipulated time limit in which the specified conditions must be satisfied.

CONDOMINIUM:

A form of ownership in which the owner has title to a housing unit and also owns a share in the common elements such as elevators, roof, common areas and, perhaps, the land.

DOWN PAYMENT:

The money paid by the purchaser to purchase the property. Usually, it represents the difference between the purchase price and the amount of the mortgage loan.

FLOATING MORTGAGE:

A mortgage for which the rate of interest fluctuates as the financial institution's prevailing prime rate changes. While the regular payments stay the same for the term, the amount applied toward the principal changes according to the change (if any) in the rate of interest.

FIRE INSURANCE:

Insurance that protects the value of the property in the event of a fire. A certificate or binder from the insurance company may be required on closing.

FIRM OFFER:

A written offer to purchase property 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).

FIRST MORTGAGE:

A mortgage that is registered as the first charge against the property. This mortgage has to be paid first in the event of sale or default.

GROSS DEBT SERVICE (GDS) RATIO:

The percentage of gross income required to cover monthly payments associated with housing costs (principal, interest, taxes and utilities). Most lenders recommend that the GDS ratio be no more than 32% of your gross (before tax) monthly income.

HOLDBACK:

Money required to be withheld back on each draw by the lender (usually 10% of the mortgage amount) during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.

INTEREST:

Interest is the cost of borrowing. It is the amount of interest paid on the money borrowed as stated on the mortgage document.

LIABILITIES:

Money owed. For example: taxes, mortgages, car loans and credit card balances, etc.

MATURITY DATE:

The last day of the term of your mortgage agreement. The mortgage must be paid in full, or the mortgage must be renewed by this date.

MORTGAGE DISABILITY INSURANCE:

An insurance rider to a mortgage life insurance contract that would cover the mortgage payments if the mortgagor became disabled.

MORTGAGE LIFE INSURANCE:

Term insurance which pays if death of the mortgagor occurs within a stated period, for the value of the then mortgage debt. A maximum dollar amount may apply. Some policies may contain riders that cover the terminally ill or accidental dismemberment within the same contract.

MULTIPLE LISTING SERVICE (MLS):

A database of available real estate for a particular area.

OFFER TO PURCHASE:

A formal, legal agreement which offers a certain price for a specified real property.

PAYMENT FREQUENCY

The choice of making regular mortgage payments every week, every other week, twice a month or monthly.

P.I.T. (PRINCIPAL, INTEREST AND TAXES):

Together, these make up the regular payment on a mortgage if you elect to include property taxes in your mortgage payments.

PRE-APPROVED MORTGAGE:

A maximum mortgage amount and interest rate that is arranged prior to the purchaser finding a house. Often this is arranged prior to home-shopping; this option helps the purchaser establish an affordable price range.

PREPAYMENT CHARGE:

A fee charged by the lender when the borrower repays all or a portion of a mortgage loan more quickly than provided for in the mortgage agreement.

PORTING:

This allows for a move to another property without having to lose the existing interest rate. You can keep your existing mortgage balance term and interest rate plus save money by avoiding early discharge penalties.

PRINCIPAL:

The amount of money borrowed for a new mortgage.

PROPERTY TAX ACCOUNT:

An option or requirement (depending on the conditions of the mortgage agreement) providing for the automatic payment of property taxes. The amount is added to the regular payment and paid by the due date.

RENEWAL:

At the end of the mortgage term, the borrower renegotiates new terms and conditions acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full.

RESERVE FUND:

A fund set up by a condominium corporation for major repair and replacement of such things as roofs, plumbing and heating systems, etc.

SWEAT EQUITY:

Equity created by the purchaser by performing improvements on a property being purchased.

TERM:

This is the length of the current mortgage agreement which states the interest rate and mortgage payments. A mortgage may be amortized over a long period, such as 25 years, with a shorter term (six months to 5 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 37% of gross monthly income.

VENDOR TAKE BACK:

Where the seller (vendor) of a property provides some or the entire mortgage financing in order to sell the property.
 

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