Mortgage Glossary: Understanding The Language Of Mortgages
A guide to common mortgage terms and jargon.
Whether you're purchasing your first home, upgrading to a larger home, downsizing or relocating, if you need a mortgage, chances are you'll come across some, if not all of the following terms. Given that a mortgage is a long term commitment, it's best you understand the terminology used when shopping for your mortgage as you'll have to live by the terms of your mortgage for years to come.
Abandonment When you voluntarily relinquish your home without transferring ownership, you have legally abandoned your property. In recent years, abandonment has been used as a last resort against foreclosure. However, abandoning your property is not as simple as giving two weeks' notice. It may send your FICO score plummeting by 100 points or more, and under certain circumstances, forgiven mortgage debt may have to be reported as taxable income.
Actual Age The actual age of a building is how much time that has elapsed since the building was first built.
Agreement of Purchase and Sale A purchase and sale agreement, also called an agreement of sale, is a legal document in which you, the buyer, offer a specific price for a home for sale. A purchase and sale agreement often includes pertinent information such as the closing date of the transaction, closing fees, the real estate agent's commission, required property inspections prior to sale, and exactly what property is being sold under the contract. A seller may propose a counteroffer price, which may also specify his or her preferred conditions of sale, and you have a limited amount of time to accept or reject it. Make sure you know what you're getting into; you cannot back out of a purchase and sale agreement once you have submitted it.
Amortization Amortization is the time span required to fully repay your mortgage based on a set number of fixed payments, that is, it is an estimation of how long you will be paying off your mortgage. Amortization periods in Canada range from 1 to 30 years; the maximum legal amortization period for a high-ratio mortgage is 25 years. Both long and short amortization periods have their respective benefits. The longer the amortization period, the smaller your mortgage payments, however you will pay more in the long run due to compound interest. Negative amortization occurs when your periodic payments are not large enough to pay off accrued interest. The loan, therefore, keeps growing even though your wallet keeps shrinking. Amortization Term The term of the mortgage amortization.
Annual Mortgagor Statement The annual mortgagor statement is an annual report sent to you from your lender detailing the state of your mortgage loan, including the principal and interest paid during the year and the anticipated amount to be remunerated.
Appraisal An appraisal determines the market value of your home. The process is simple: An appraiser, a qualified and informed real estate professional, physically inspects your home inside and out. At the end of the inspection, an appraisal report is prepared and the value of the home is determined. Asset An asset is piece of property that you own and has value.
Assumption Assumption is when you accept responsibility for the mortgage of a seller whose home you are purchasing. As a buyer, you may benefit from assuming a mortgage since the loan may come without high-ratio insurance premiums and with a low interest rate. On the other hand, sellers with portable (transferable) mortgages with low interest rates can attract prospective buyers.
Balance Balance is the unpaid amount of a loan remaining. Balance is also a common credit card term
Balloon Mortgage A balloon mortgage is a medium-term loan repaid prior to its amortization period with one "balloon" payment. For instance, a mortgage might be amortized for 25 years but due in 10 years. At the conclusion of one decade, everything that would have been paid in the remaining 15 years, minus the accrued interest, is due in one lump sum. This large payoff is a called a balloon payment and is the namesake of the mortgage. Balloon mortgages usually have fixed interest rates due to their short terms, but floating rates do exist. If you can cover the large payment at maturity and the reduced home equity compared to a conventional mortgage, balloon mortgages may more than compensate with affordable monthly payments and short-term financial obligation.
Bankruptcy Bankruptcy occurs when you declare yourself insolvent and unable to afford any future payments on your loans. A formal declaration of bankruptcy requires that you owe a minimum debt of $1,000. In Canada, the Office of the Superintendent of Bankruptcy oversees bankruptcy proceedings to ensure fairness between borrowers and lenders during liquidation proceedings. A consumer proposal is an alternative to bankruptcy in which you and your creditor negotiate a payoff schedule, usually not lasting longer than five years, where you repay as much as of your loan as possible. Even though creditors usually receive less than the amount owed, most prefer consumer proposals to forced bankruptcy.
Blanket Mortgage A blanket mortgage is a loan that covers two separate pieces of real estate. Blended Payments A blended payment is a periodic payment comprised of principal and interest. Mortgages are paid off on a regular schedule, e.g., bi-monthly or monthly, through blended payments. As time goes by, the principal part decreases and the interest part increases, but the payments remain more or less even within each term.
Borrower The person who purchases a mortgage lien.
Bridge/Interim/Short-term Financing A bridge loan, nicknamed a swing loan or gap financing, is money borrowed to finance the purchase of one property while selling another. Double-digit interest rates are not uncommon which makes bridge loans more popular among large corporations than homebuyers, especially because most have no prepayment penalty. A simple way to avoid the situation would be to move the closing date of the property being purchased after the closing date of the asset being sold. Therefore, there is no overlap and no need for a bridge loan.
Buydown A buydown is a refinancing, reshuffling technique. It distributes the responsibility of mortgage payments among two sources, the buyer and the builder or seller. Rather than accepting the full brunt of the mortgage payments, you ask the builder or seller of your mortgaged property to pay part of the periodic payments for 1-5 years, which means you enjoy a small interest rate and convenient, manageable payments. In return, the builder bumps up the purchase price of the property to compensate for the initial subsidies.
CMHC The Canada Mortgage and Housing Corporation (CMHC) is Canada's national housing agency. It was established after World War II to resurrect the housing market following the return of Canadian veterans, and today, the CMHC plays an active role in Canadian urban development. One of its most common responsibilities is to guard mortgage lenders against buyers whom default on loans with a down payment of 20 per cent or less.
Cash-Out Refinance A cash-out refinance is a technique to withdraw funds from your home's virtual piggy bank. You take out a new mortgage loan that is larger than the one you currently owe and simply pocket the difference. Cash-out refinances are often used by homeowners who wish to tap into their home equity without taking out a home equity loan, which usually comes with a higher interest rate. Caveat Emptor Caveat emptor is Latin for, "Let the buyer beware." It is a formal way for a seller to tell a buyer, "as is, where is, take it or leave it."
Conditional Offer A conditional offer is a proposal to purchase which is subject to conditions. Such conditions often relate to the sale of an existing home, or securing financing. Another condition could be an adjusted sale price or a particular closing date.
Closed Mortgage A mortgage which cannot be fully prepaid, renegotiated, or refinanced before the mortgage term reaches full maturity without some sort of additional charges (e.g. three months worth of interest). Interest rates for a closed mortgage are typically lower than the rates offered for an open mortgage. This might not be as stringent as it sounds. Many closed mortgages will allow you to increase your monthly payments or make lump sum payments once a year up to a certain percentage of the mortgage without penalties and/or other charges.
Closing Costs Closing costs are costs associated with the purchase of a home which are not included in the purchase price. Some typical closing costs include land transfer taxes and legal fees.
Closing Date The date on which the sale of a property becomes final. The new homeowner usually takes possession on this date.
Collateral Collateral is a borrower's pledge of property to the lender, to secure repayment of a loan in the event of a default.
Combined Loan-to-Value A combined loan-to-value (CLTV) is a ratio often used when underwriting a second or third mortgage. It adds up all of the outstanding loans on a home and divides that amount by the estimated value of the asset. It can often indicate the likelihood of foreclosure, the amount of home equity and the general creditworthiness of the homeowner.
Construction Mortgage Also known as a construction loan, a construction mortgage is obtained when you take out a mortgage loan to build a home. There are two types of construction mortgages: self-contained and construction-to-permanent. In both types of loans, you only pay interest on your loan during construction. Once the building is constructed, the entire principal is due if you have a self-contained loan. With a construction-to-permanent loan, the construction mortgage morphs into a conventional mortgage, and business proceeds as usual.
Conventional Mortgage A conventional mortgage is what you'll get if you have a down payment that is 20 or more per cent of the property's purchase price. With a conventional mortgage, you will not be required to get mortgage loan insurance.
Convertible Mortgage A convertible mortgage begins as an adjustable-rate mortgage and then, after a certain amount of time, allows you to convert it to a regular mortgage with a fixed interest rate. Co-Signer One who performs the act of co-signing.
Co-Signing Co-signing is the act of promising to pay another person's debt if he or she defaults. Co-signers, also called guarantors or sureties, must pay the loan if the other signer fails to.
Credit Score Your credit score is a numerical rating of your credit worthiness, that is, how reliable you are to repay a loan. In Canada, FICO credit scores range from 300 to 900 with a median range of 720-760. A robust credit score helps you obtain loans without a co-signer and snags lower interest rates. There are many ways to boost your credit score, including repaying outstanding debt, distributing credit among credit lines and not using available credit.
Debt-to-Credit Ratio Lenders can easily calculate your debt to credit ratio is to see just how close to being in financial trouble you are. Debt used divided by Available credit = Debt Load.
Debt-to-Equity Ratio The debt-to-equity ratio indicates the relative proportion of equity and debt used to finance a mortgage loan.
Debt-to-Income Ratio A debt-to-income ratio, or DTI, is the percentage of your income per month that goes to paying off all recurring debt payments. This type of DTI is called a back-end ratio; a front-end DTI only includes payments to housing costs. There are many other economic ratios, such as debt-to-equity, debt-to-credit and debt-to-capital, used in the underwriting process as well.
Deed A deed is a certificate of ownership which transfers a home from the seller to the purchaser. A deed is registered against the title to the property as evidence of the purchaser's ownership of the property. Default A default occurs when you can no longer afford your loan payments and stop making payments. In the event of default, most lenders have one or more acceleration clauses, which provide reasons why the lender can immediately repossess the borrower's collateral assets or demand the remaining balance of the loan.
Delinquency Delinquency occurs when you do not submit a payment on time. Many mortgage policies have a grace period of ~30 days for payment. Deposit A deposit is a sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor's agent, broker, lawyer or notary until the closing date.
Depreciation Depreciation is the decrease in the value of an asset over time.
Discharge of Mortgage A mortgage is discharged when the loan is completely repaid and the lender issues a certificate officially stating so.
Down Payment A down payment is the amount of money you pay upfront towards the full purchase of your home or property. The larger the down payment, the less money you need to borrow and the less interest you accrue on a mortgage loan. Down payments in Canada can be as low as five per cent of the purchase price, although 10 per cent is quite common and is a good rule of thumb to use when calculating your down payment.
Effectual Age This is a term often used by appraisers to determine the remaining life of a building based on its utility, in other words, how well the property has fared over the years.
Encumbrance An encumbrance is a claim against an asset by another party that obstructs its transferability or shrinks its value.
Equity Are you looking for home equity?
Firm Offer Irrevocable, written, and signed offer regarding the sale or purchase of real estate at a specified price, and valid for a specified period. If no closing or expiration date is specified, the offer is normally considered to be open for 30 days after its presentation. A firm offer is also referred to as a confirmed offer.
Fixed Rate Mortgage In a fixed-rate mortgage, the interest rate stays steadfast. The interest rate for a fixed rate mortgage will not fluctuate. It is set, and will not change for the entire term of the mortgage. Forbearance Forbearance is an agreement that occurs when you ask your lender to not repossess your home, but rather negotiate a mortgage plan that will work with your financial situation. Understandably, forbearance is only exercised when a homeowner can demonstrate that the present crisis is but a hiccup in a long history of fruitful finances.
Foreclosure A foreclosure, also called repossession, occurs when a lender attempts to recover the balance of principal by forcing the sale of the collateral asset.
High-Ratio Mortgage A high-ratio mortgage is what you'll have if your down payment is less than 20 per cent of a home's purchase price. This type of mortgage may require mortgage default insurance. Mortgage default insurance is provided by the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, or Canada Guaranty Mortgage Insurance Company. If needed, your lender will make the necessary arrangements.
Holdback A holdback is an amount of money required to be withheld by the lender during the construction or renovation of a home to ensure that construction is completed to the buyer's satisfactorily . Home Equity Home equity is the estimated market value of your home minus the total outstanding debts registered against it. See also: cash-out refinance.
Interest and Mortgage Rate Interest-as it relates to loans--is basically the fee you pay for borrowing money. The interest you are charged when getting a mortgage is called a mortgage rate. The mortgage rate is the percentage interest you will pay back on top of the money you borrowed.
Lender The party that provides a loan.
Liability Liability in refers to an obligation to pay a debt.
Lien A lien is a legal form of security interest granted over an item of property to secure the payment of a debt. The borrower who grants the lien is referred to as the lienor and the lender is referred to as the lienee.
Low-Balling Low-balling is a colloquial term for a buyer who offers enough money for the lawn and expects the house to come with it. Low-ball offers are common for houses that have languished on the market for several months.
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Maturity Date A maturity date refers to the final payment date of a mortgage, at which point the principal and all remaining interest is due to be paid.
Moratorium A moratorium is a blanket blockage against a certain action or set of actions. In recent years, a few have called for a moratorium on home foreclosures due to economic recessions, but none have achieved it.
Mortgage A mortgage is the pledge of a property to a lender for security of a loan. In colloquial use, a mortgage usually refers to a mortgage loan, which is comprised of the payments of principal and interest that a borrower owes to a lender.
Mortgage Default Insurance If you have less than 20 per cent of the home's purchase price for your down payment, your lender will have to obtain mortgage default insurance on your behalf. The law requires it of federally regulated lenders. As a high-ratio borrower, you will have to pay for the mortgage insurance premium. This premium can be added to your mortgage balance. This insurance protects the lender (not you the homeowner) from losses that may arise. For example, if you default on your mortgage and the lender forecloses on the property, the lender will submit a claim to the insurer if the proceeds of the foreclosure do not cover the lender's losses.
Mortgage Life Insurance Mortgage life insurance covers the balance of a mortgage in the event the person whose name the loan is under dies. Often recommended additions to mortgage life insurance are mortgage critical illness insurance and disability impairment insurance, which means that if you come down with a life-threatening illness or chronic handicap, the lender will help repay the remaining loan balance.
Mortgage Rate When you take out a mortgage, you are borrowing money from a lender. The mortgage rate is the percentage interest you will pay back on top of the principal.
Mortgage Term A term is a specified length of time that a borrower has agreed to certain loan conditions, such as an interest rate and a payment schedule. Terms usually range from six months to 10 years. Once a term is complete, it has matured, and the remaining loan may roll over - be renewed - with new conditions mutually acceptable to both lender and borrower. This is the best time to pay off a large chunk of the mortgage in a lump sum payment without prepayment penalties. If the mortgage is not renewed at the end of a term, the lender is entitled to be paid in full.
Mortgagee and Mortgagor Legal terms for lender and borrower.
Net Worth Net worth is total assets minus total liabilities, e.g., the market value of a home minus the outstanding mortgage against it.
No-Documentation Loan Known in verbal short-hand as a "no-doc loan," a no documentation loan requires little personal information. The mortgage is underwritten based primarily on the applicant's credit history and the size of the down payment on the property in question.
No Money Down Mortgage Enacted like it is spelled, this type of mortgage requires no down payment. However, the corresponding interest rate tends to be substantially higher when compared to a conventional mortgage.
Open Mortgage An open mortgage can be prepaid, in part or in full, at any time during the mortgage term, without the penalties associated with a closed mortgage. Interest rates for an open mortgage are typically higher than the rates offered for a closed mortgage.
- Monthly (12 payments/year)
- Semi-Monthly (24 payments/year)
- Bi-weekly (26 payments/year)
- Weekly (52 payments/year)
- Accelerated bi-weekly (26 payments/year)
- Accelerated weekly (52 payments/year)
P.I.T.H P.I.T.H. stands for
Principal, Interest, Taxes and Heating. P.I.T.H., which can alternatively be calculated as P.I.T. or P.I., is the summation of principal, interest, taxes and heating costs per month. It is used as a numerical standard when underwriting a mortgage. In Canada, the CMHC will usually not issue a mortgage if the P.I.T.H. exceeds 32 per cent of a borrower's gross annual income.
Percentage Point Percentage point (or points) is the difference between two sets of percentages. For example, if rates are 1 per cent and they rise to 3 per cent the difference is 2 percentage points.
Porting Porting your mortgage is when you transfer your mortgage from one property to another. If you might wish to move moving during the term of your mortgage, then this feature might be appealing. Some mortgage lenders allow this, and some do not.
Prepayment Option Mortgage prepayment options outline the flexibility you have to increase your monthly mortgage payments, or pay off your mortgage completely without penalty.
Prepayment Penalties If you pay off your entire home loan or part of the loan prematurely on a closed mortgage, your lender charges you prepayment penalties, such as an interest rate differential (IRD) or three months' worth of accrued interest. If you want to pay off your mortgage early, you may either opt for an open mortgage, a balloon mortgage or simply refinance your mortgage at the end of the loan's term.
Prime Lending Interest Rate The prime lending rate governs the interest rate on your mortgage. Most lenders have an index system, often tied to the Bank of Canada, which issues a daily lending rate based on market conditions.
Pre-Approval Mortgage lenders determine the loan amount they would lend to a potential homebuyer based on a review of the applicant's credit history.
Prime Rate The Canadian prime mortgage lending rate is set by the Bank of Canada, and each lender sets its own prime rate based on the rate set by the Bank of Canada.
Principal The amount initially borrowed for a loan.
Quiet Possession Quiet possession is an important privilege for you, the mortgage owner. Even though you may have not completely paid for the property you claim, you are entitled to use it as if you do own it. A quiet possession clause is standard fare in most mortgage contracts and only ends in the event of default.
Real Estate Real estate is a building or home, and it often includes the land underneath it. Real estate can also be land, and not contain a building.
Real Estate Broker A real estate broker is a professional who is licensed to legally represent a buyer during a sales transaction of realty.
Refinancing Refinancing your loan is the act of renegotiating interest rates, payment schedules and so forth at the end of a term.
Reverse Mortgage According to the Financial Consumer Agency of Canada, a reverse mortgage is a loan that is only available to homeowners 55 or older. Basically, the way it works is the homeowner borrows against the equity they've built up in their home.
Second Mortgage A second mortgage is just what it sounds like. It is subordinate to the first mortgage, meaning that in the case of default, the first mortgage must be paid off first. Both mortgages are liens, which is a lender's right to retain secured assets until a debt or obligation is paid. Several Liability Several liability means that one party carries the responsibility for a loan, and is the opposite of joint liability.
Shared-Appreciation Mortgage A shared-appreciation mortgage (SAM) is a mortgage where you can pay back some of your loan by utilizing the appreciation (increase in value) of your home. In other words, the lender agrees to a low interest rate now, speculating that in 10-20 years, the value of your home will have increased enough to compensate for the loss in accrued interest. You speculate the opposite.
Subprime Mortgage Subprime mortgages are loans made to borrowers with little or no credit worthiness. In Canada, a subprime mortgage is usually defined as a home loan underwritten to someone with a FICO score under 620.
Survey or Certificate of Location A Certificate of Location, simply a called a survey in short-hand, is a legal statement saying you live in said house, on said land, and no one else does. It is a common prerequisite required by a lender before underwriting a mortgage, and it often includes information describing the building and any structural additions, the condition of the accompanying land and so forth.
Title A title is a formal document which serves as evidence of property ownership.
Total Income Total income is all money you earned over the calendar year not including holiday gifts, inheritances and other non-taxable forms of income.
Taxable Income Taxable income is total income minus non-refundable tax credits, exemptions and other reductions provided by the government. This amount is taxable by the government; which tax rate you pay depends on which tax bracket you fall into.
Umbrella Mortgage An umbrella mortgage, also called a wraparound mortgage, is a phrase used when you roll up all of your loans into one mortgage. For instance, if you have an auto loan, a home loan and a furniture loan, you can consolidate all of these mortgages into one loan with a single interest rate, term, etc. Umbrella mortgages are usually capped by the value of your home, usually between 75 and 90 per cent of its estimated market value.
Underwater Mortgage An underwater mortgage is description often used when the loan borrower owes more towards the mortgage than the market value of the home. The home is thus unsellable and usually leaves the homeowner with only two solutions: foreclosure or refinancing.
Underwriting Underwriting is the process when a lender determines whether to provide a home loan and under what conditions. Underwriting is often guided by the three C's: credit, capacity and collateral. As a borrower, your credit score, TDS, debt-to-equity ratio and a myriad of other factors play into whether or not you are eligible for a mortgage and, if so, under what conditions.
Variable-Rate Mortgage A variable rate mortgage is a mortgage where the interest rate fluctuates according to changes in the prime lending rate. The payments for a variable rate mortgage do not fluctuate with the fluctuation of the interest rate. Instead, if interest rates go down, more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to payment of interest. Variable-rate mortgages (VRMs) go by numerous aliases, including adjustable-rate (ARM), floating-rate or tracker mortgages. Every VRM has an adjustment period, a length of time where the interest is guaranteed to remain stable. At the end of the adjustment period, the interest rate may be reset by the lender. Some VRMs have interest rate caps to prevent payments from fluctuating too drastically. Adjustment caps and adjustment periods are often represented in a simple x/y/[z] format. For instance, a 3/2 is for a hybrid VRM with an initial adjustment period of three years, followed by subsequent two-year adjustments. In the case of adjustment caps, the x/y/z format represents initial adjustment cap/subsequent adjustment cap/lifetime adjustment cap. For example, a 2/3/5 means that the interest rate cannot fluctuate more than two percent on the initial adjustment period, three percent on the following periods and five percent over the lifetime of the loan.
Wraparound Mortgage A wrap-around mortgage is a loan in which the lender assumes responsibility for an existing mortgage. A wraparound mortgage is a form of secondary financing on a real estate loan. In a wraparound mortgage, all outstanding mortgages are amalgamated into a single loan. Payments are then made the new property buyer to the seller, who in turns makes mortgage payments to the mortgagee. This financial tool is also commonly referred to as a "wrap".
X A common symbol used in contracts and legal documents to indicate where the signature or signatures of the parties involved must be written.