Pre-Approval
It is important to obtain a pre-approval for the amount of money you can borrow from a lender and avoid looking at homes that may be out of your price range. The pre-approval process is usually guaranteed for a period of 90 days. For additional security for the lender, you may want to have a co-signer – a party who signs the mortgage documents along with the borrower, but who does not have any interest in the ownership of the property.
What is a Mortgage?
Few people can come up with the entire amount of money required to pay for the cost of a home. A mortgage is a loan of the money most people require to finance the purchase their home. A mortgage allows individuals to buy property without paying the full value all at once. The mortgagor is the person borrowing money, the mortgagee is the lender of the money.
When negotiating the amount of your mortgage, you should be aware that you will most likely be required to provide a down payment which is the money you put towards the purchase price of your home. The amount of your mortgage is determined by the purchase price of the home less the amount of your down payment. As with all loans, a mortgage must be repaid to the borrower with interest. There are different types of repayment methods which make up the different kinds of mortgages available.
Like all loans, regular payments made over time go towards paying down the mortgage. These payments are made up of two parts – one part goes towards paying the principal (the amount of money borrowed) and other part goes towards paying the interest (the fee charged for borrowing the money.)
The more money you can put down, the less you will have to borrow, and the less interest you will have to pay over the length of the mortgage.
If you have a down payment equivalent to 20% or more of the purchase price, you will have what is called a conventional mortgage.
If your down payment is less than 20% of the purchase price, you will have what is called a high ratio mortgage. A high ratio mortgage must be insured to protect the lender. This insurance is called mortgage default insurance. It protects the lender in case the borrower isn’t able to repay the loan.
Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and AIG United Guaranty offer assistance to first-time home buyers who do not have a lot of disposable funds for a down payment. Ask your mortgage professional for more details.
Mortgage Terms
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.
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.
Closed Mortgage
The restriction or denial of repayment rights until the maturity of the mortgage.
Conventional Mortgage
A mortgage loan which does not exceed 75% of the appraised value or purchase price of the property, whichever is the lesser of the two.
Default
Non-payment of the installments due under the terms of the mortgages. Mortgagee
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.
Discharge
The removal of all mortgages and financial encumbrances on a property.
Foreclosure
A legal procedure whereby the lender obtains ownership of the property following default by the borrower.
Gross Debt Service Ratio
The percentage of gross annual income required to cover payments associated with housing (mortgage principal and interest, taxes and secondary financing). Most lenders prefer that the GDS be no more than 32%.
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 Life Insurance
A form of reducing term insurance recommended for the borrower. In the event of the death of the owner or one of the owners, the insurance pays the balance owing on the mortgage. The intent is to protect survivors from losing their home.
Open Mortgage
A mortgage which can be prepaid at any time, without penalty.
P.l.T. (Principal, Interest, & Taxes)
Principal, interest and taxes due on a mortgage.
P.I. (Principal & Interest)
Principal and interest due on a mortgage.
Principal
The amount you still owe the lender at any time.
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 specified amounts of the principal balance. Penalty interest may be incurred on prepayment options.
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.
Second Mortgage
This is usually at a higher interest rate and represents the difference between the price of the house and first mortgage plus the down payment.
Term In a mortgage
"Term" is the actual length of time for which the money is loaned, at that particular rate of interest. After the term expires, you can either repay the balance of the principal then owing or renegotiate the mortgage at current rates and conditions.
Total Debt Service Ratio (TDSR)
The ratio of total annual income relative to a borrower's total payments, GDS payments plus other debts such as bank loans, finance company loans, credit card payments, car payments etc. Most lenders prefer this not exceed 40-42%.
Underwriting Fees
A sum of money collected by some lenders to offset expenses incurred in the lending transaction.
Variable Rate Mortgage (Floating Rate)
A mortgage where payments can be fixed from one to five years, but the interest rate could change from month to month depending on market conditions. Interest rates fluctuate with the prime lending rate.
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.
