Financial Literacy Month: Mortgage Lingo
Did you know that November is Financial Literacy Month in Canada? It is, and it’s the perfect time to educate yourself a little more on the financial process of home buying. When it comes to taking on one of the biggest investments of your life, the more you understand about mortgages, the better. Being literate about home finances starts with the basics, and that means having an understanding of the basic lingo you’ll come across in the mortgage and home buying process.
Here’s a quick glossary of words and definitions you’ll come across in the mortgage process:
Amortization: the length of time over which your mortgage debt will be repaid. Closing costs: these are costs in addition to the purchase price of the home, such as legal fees, transfer fees and disbursements, that are payable on closing day. They range (on average) from 1.5% to 4% of a home’s selling price.
Appraisal: this is the process done by an appraiser that determines the value of the property you wish to purchase, to determine if it meets lending criteria.
Closed Mortgage: this is a type of mortgage which cannot be prepaid, renegotiated or refinanced prior to the mortgage’s expiry (other than with breakage costs).
Deed: this is a legal document that transfers ownership in the real property to the purchaser.
Down payment: this is the portion of the home price that is not financed by the mortgage loan. The buyer must pay the down payment from his/her own funds or other eligible sources before securing a mortgage.
Equity: this is the difference between the price for which a home could be sold and the total debts registered against it. This is ultimately the value you build in your home during homeownership.
Fixed-Rate Mortgage: this is a type of mortgage that has an interest rate set for a pre-determined term, and cannot be renegotiated without breakage costs. Interest on fixed-rate mortgages is calculated semi-annually rather than in advance.
Gross Debt Service Ratio: this is the percentage of the borrower’s gross income that will be used for mortgage payments, interest, taxes and condominium fees (if applicable).
Interest: this is the cost of borrowing money for a mortgage. Interest is usually paid to the lender in regular payments along with repayment of the mortgage loan amount.
Mortgage: this is a loan for the purchase of a home. A mortgage is a security interest given in the property you are purchasing which secures repayment of the loan related to the property.
Mortgage Broker/Representative: this is a professional who works with a financial institution(s) to help you in getting a mortgage (loan) for the purchase of your home. The lender is an institution (bank, trust company, credit union, etc.) that lends money for a mortgage.
Mortgage Default Insurance: this insurance is mandatory for borrowers that have less than a 20% down payment.
Mortgage Loan Insurance: “mortgage loan insurance is required for residential mortgage loans with a loan-to-value ratio of more than 80%, and is available from CMHC or a private company.” (CMHC website)
Open Mortgage: this is a type of mortgage that can be prepaid at any time prior to the maturity rate, without breakage costs.
Term: this is the length of time during which your mortgage agreement is effective. After a term expires, the balance of the loan is due in full or a renegotiated mortgage term is laid out.
Title: this is an interest in land that gives the holder ownership of the land and building for an indefinite period.
Total Debt Service Ratio: this is the percentage of the borrower’s gross income that will be used for monthly payments of principal, interest, taxes heating and other outstanding loans and debts. This number helps lenders determine what mortgage amount you can qualify for.
Variable Rate Mortgage: this is a type of mortgage that has a fluctuating interest rate, according to changes in the prime lending rate.
To find out more about Financial Literacy Month and to access a free database of online resources on personal finances, check out the Financial Consumer Agency of Canada, and check out #FLM2014 on Twitter.