Some basic home-financing terminologies you need to know to make a more informed decision:
Agreement of Purchase and Sale
A legal agreement that offers a certain price for a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).
Acceleration
The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale Clause.
Adjustable Rate Mortgage (ARM)/Variable Rate Mortgage
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index (usually based on the prime rate) is called an ARM. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.
Amortization Period
The amount of time over which the entire debt will be repaid assuming the same interest rate.
Appraisal
The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home.
Approval/Commitment
This is an agreement issued by a lender evidencing the approval and terms of a mortgage. A Commitment (or an offer) usually stipulates a list of conditions that must be met before the deal is funded.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage.
Bridge Loan
This is a temporary loan that enables you to purchase your new property before you are able to sell your old property.
Closing
The act of signing all documents required to transfer title of a property and, if necessary, to establish the lien and create the mortgage and disburse the funds. Also referred to as settlement.
Closing Costs
The fees paid at closing to various parties, to transfer the title of a property and, if necessary to establish the lien and create the mortgage. These costs may include legal fees, land transfer tax, title insurance and other disbursements.
Closed versus Open Mortgages
A mortgage that agreement that cannot be repaid, refinanced or renegotiated until maturity, unless otherwise stated in its terms is a closed mortgage.
An open mortgage allows a borrower to repay any amount of the principal at any time without notice or penalty.
Condition of Financing
This is a condition precedent in the Agreement of Purchase and Sale, which gives the purchaser/borrower usually 5-10 days (for residential mortgages) to secure mortgage financing. A prudent borrower would not waive this condition until a firm commitment is received from a willing lender. The borrower and his/her mortgage broker should first verify that all conditions on the commitment could be met before proceeding to waive the condition of financing.
Conventional (versus High Ratio) Mortgages
A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit must be insured against default, and are referred to as high-ratio mortgages.
Credit Score
A numerical quantity reflecting a borrower's credit worthiness. Used by lenders to find out the risk in approving a home loan.
Debt Service Ratios
The two commonly used ratios to determine the capacity of a borrower to service his/her mortgage are:
- a. Gross Debt Service Ratio (GDS) The ratio, expressed as a percentage, which results when a borrower's housing expenses (e.g. mortgage payment, property tax, heating cost etc) are divided by the borrower’s gross monthly income.
- b. Total Debt Service Ratio (TDS) The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts (including mortgage payments, credit card payment, car payment, student loan etc) is divided by his or her gross monthly income.
Down Payment
The amount of cash which the homebuyer pays towards the purchase price at closing.
Fixed Rate Mortgage
A mortgage with a fixed rate for a specific term/period e.g. for 5 or 3 years. Fixed rate mortgages are most desirable when current interest rates are low.
Home Equity
The difference between the price for which a home could be sold (market value) and the total debts registered against it.
Home Inspection
This is usually done to protect the homebuyer. Significant defects uncovered should be fixed before closing or seller may agree to reduce the purchase price to cover the costs of these repairs (if not sold as is).
Loan-to-Value (LTV)
The amount of the mortgage loan compared to the value of the property. This ratio is calculated by the lender prior to making the loan available.
Maturity
The end of the mortgage term. Usually this is when the mortgage becomes due for renewal.
Mortgage
A legal process by which you can take out a loan against your own property - residential or commercial. The same property is held as the security for the repayment of the debt.
Mortgage Broker
An individual in the business of assisting in arranging funding or negotiating a mortgage for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission/finder’s fee for their services.
Mortgagee
The lender/bank offering the loan
Mortgagor
The borrower or homeowner
Mortgage Default Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. This insurance protects the mortgage lender in case the borrower defaults on the mortgaged payments. The commonly used insurers by lending institutions are CMHC, AIG and Genworth.
Mortgage Term
The number of years or months over which, you pay a specified interest rate. Terms usually range from six months to 10 years.
Open Mortgage
A mortgage which can be prepaid at any time, without penalty.
P & I Payments
Regular payment which is comprised of both a Principal and an Interest component.
Porting
This allows you to move to another property without having to lose your existing interest rate. You can keep your existing mortgage balance, term and interest rate plus save money by avoiding early discharge penalties.
Pre-Approval
A process whereby a specific mortgage lender certifies that a prospective borrower is financially qualified and creditworthy for a specific type of loan with specified terms for an amount up to a specified maximum. Actual advancement of the loan will depend on the suitability and value of the collateral property, which is unspecified at the time of pre-approval and verification of all supporting documents.
Refinancing
Renegotiating your existing mortgage agreement. May include increasing the principal or paying out the mortgage in full.
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one.
Title
The legal evidence that shows the rightful owner of land.
Title Insurance
A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests.
Title Search
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
