Mortgage Terminology Guide: Essential Terms Explained
Navigating the world of mortgages can be overwhelming, especially when faced with industry-specific jargon. To help simplify the process, we’ve compiled a comprehensive glossary of essential mortgage terms, ensuring that you can make informed decisions with confidence. Let’s explore these key terms in an engaging, easy-to-understand manner.
Amortization: The process of gradually repaying a mortgage through regular payments over a specified period, typically ranging from 15 to 30 years. Amortization schedules show the division of each payment between principal and interest.
Annual Percentage Rate (APR): A broader measure of the cost of borrowing, including the interest rate, mortgage insurance, and loan origination fees. The APR is expressed as a percentage and helps compare different mortgage offers.
Appraisal: A professional evaluation of a property’s market value, typically conducted by a certified appraiser. Lenders require appraisals to ensure that the mortgage amount does not exceed the property’s worth.
Bridge Financing: A short-term loan that covers the gap between the purchase of a new property and the sale of an existing one. Bridge financing helps homebuyers avoid making two mortgage payments at once.
Closed Mortgage: A mortgage that restricts prepayment options or imposes penalties for paying off the loan early. Closed mortgages usually have lower interest rates compared to open mortgages.
Co-signer: A person who agrees to assume legal responsibility for a mortgage if the primary borrower defaults on the loan. Co-signers may help borrowers with weaker credit profiles secure a mortgage.
Debt-to-Income Ratio (DTI): A financial metric used by lenders to assess a borrower’s ability to repay a mortgage. DTI is calculated by dividing monthly debt payments by gross monthly income and is expressed as a percentage.
Down Payment: An initial lump-sum payment made by the homebuyer towards the property’s purchase price. In Canada, the minimum down payment ranges from 5% to 20% depending on the property’s value.
Equity: The difference between a property’s market value and the outstanding balance of the mortgage. Homeowners can build equity by making mortgage payments, improving their property, or benefiting from market appreciation.
Fixed-Rate Mortgage: A mortgage with a constant interest rate throughout the term. Fixed-rate mortgages offer stability and predictability, as the monthly payments remain the same.
High-Ratio Mortgage: A mortgage in which the borrower’s down payment is less than 20% of the property’s value. High-ratio mortgages require mortgage default insurance to protect the lender in case of default.
Home Buyers’ Plan (HBP): A Canadian government program that allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) tax-free to use as a down payment.
Interest: The cost of borrowing money, expressed as a percentage of the mortgage amount. Lenders charge interest as compensation for providing the loan.
Loan-to-Value Ratio (LTV): A financial metric comparing the mortgage amount to the property’s appraised value. LTV is calculated by dividing the mortgage amount by the appraised value and is expressed as a percentage.
Mortgage Broker: A licensed professional who helps borrowers find and secure a mortgage by connecting them with lenders. Mortgage brokers work on behalf of the borrower and often have access to a broader range of mortgage products than banks.
Mortgage Default Insurance: A type of insurance required for high-ratio mortgages that protect lenders in case the borrower defaults on the loan. In Canada, mortgage default insurance is provided by organizations such as the Canada Mortgage and Housing Corporation (CMHC).
Mortgage Term: The length of time a mortgage contract is in effect, usually ranging from 6 months to 10 years. At the end of the term, the mortgage must be renewed, refinanced, or paid off.
Open Mortgage: A flexible mortgage that allows borrowers to make extra payments or pay off the loan early without penalties. Open mortgages generally have higher interest rates compared to closed mortgages.
Porting: The process of transferring a mortgage from one property to another, typically when a borrower moves to a new home. Porting allows borrowers to maintain their existing mortgage terms and avoid prepayment penalties.
Pre-Approval: A conditional commitment from a lender indicating the maximum mortgage amount a borrower qualifies for based on their financial profile. Pre-approvals help homebuyers understand their purchasing power and demonstrate credibility to sellers.
Prepayment Privilege: A mortgage feature that allows borrowers to make extra payments without incurring penalties. Prepayment privileges can help reduce the mortgage’s principal balance and decrease the total interest paid over time.
Principal: The original amount borrowed in a mortgage, excluding interest. Mortgage payments are applied toward both the principal and interest, gradually reducing the outstanding principal balance.
Rate Hold: A guarantee from a lender that secures a specific interest rate for a certain period, typically 30 to 120 days. Rate holds protect borrowers from potential interest rate increases during the mortgage application process.
Refinancing: The process of replacing an existing mortgage with a new one, often to secure a lower interest rate, change the mortgage term, or access home equity. Refinancing can involve costs, such as prepayment penalties and legal fees.
Renewal: The process of extending a mortgage contract when the term expires. Borrowers can negotiate new terms and interest rates with their lender or switch to a different lender upon renewal.
Stress Test: A financial assessment Canadian lenders use to ensure borrowers can handle potential interest rate increases. The stress test evaluates a borrower’s ability to make mortgage payments at a higher interest rate than the contracted rate.
Title Insurance: A type of insurance that protects homeowners and lenders from issues related to the property’s title, such as fraud, forgery, or undisclosed liens. Title insurance is typically required in Canadian real estate transactions.
Variable-Rate Mortgage: A mortgage with an interest rate that fluctuates based on changes in the prime rate. Variable-rate mortgages can offer potential savings if interest rates decrease but also carry the risk of higher payments if rates rise.
Understanding essential mortgage terms is key to making informed decisions during the home-buying process. By familiarizing yourself with this terminology, you’ll be better equipped to navigate the Canadian mortgage market and secure a mortgage that aligns with your financial goals. Remember, the Genesis Group is here to support you and provide expert guidance with every step of the way.