06 Nov Getting a Mortgage? Terms to Understand
Getting a Mortgage? Terms to Understand
Whether you’re looking to buy your first home, sell your long time home, or refinance your mortgage, you need to understand the key terms used and their importance. Preparation is key to give you the best advantage. Here are some definitions of keys terms.
Pre-Approval for a Mortgage – A pre-approval gives you a clear budget (maximum price) and locks in a rate for up to 120–130 days. It also strengthens your offer when competing for a home as you are able to state that you are pre-approved
Term – The length of time the interest rate is fixed. At the end of the term, the mortgage can be either paid off or renewed for another term.
Amoritization period – The number of years it will take to repay the loan in full – usually no longer than 25-30 years. Longer amortization periods result in lower payments but also increase the total amount of interest paid. Certain lenders may extend amortization periods up to 30 or 35 years.
Credit Score – Your credit score has a direct impact on the rate and options available to you. Review your report and address any inaccuracies. Pay down credit card balances and avoid taking on new debt.
Down Payment – 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. Minimum down payment: 5–20%, depending on the price.
Deposit – When buying a house, especially for the first time, it’s easy to confuse the concept of your deposit with your down payment.The deposit is the amount specified on the agreement of purchase and sale and is due within 24 hours of an agreement being accepted by the seller and purchaser. The purchaser’s deposit is held in trust by the real estate brokerage of the seller. The deposit will be applied to the purchase price on closing.
High-ratio mortgage / conventional mortgage – A high ratio mortgage is a mortgage loan higher than 80% of the lending value of the property. A conventional mortgage is a mortgage loan up to a maximum of 80% of the lending value of the property.
Mortgage loan insurance – is typically required for residential mortgage loans with a loan-to-value ratio of more than 80%, and is available from CMHC or private companies. It is important not to confuse mortgage loan insurance with mortgage life insurance, which gives coverage for your family if you die before your mortgage is paid off.
Closing Costs – Usually 1.5–4% of the purchase price (land transfer tax, legal fees, home inspection, moving, etc.).
Market Evaluation – process used by realtors to determine a home’s current market value given sales of comparable homes and present market conditions.. Market value is not the same thing as price. Depending on the market, supply, demand and competition you may choose a list price different than market value
Mortgage discharge or prepayment penalties – Understand if there are penalties for breaking your term early. Some fixed-rate mortgages carry hefty prepayment charges.
Gross Debt Service Ratio (GDS) / Total Debt Service Ratio (TDS) GDS is the percentage of the gross income that will be used for payments of principal, interest, taxes and heating costs and 50% of any condominium maintenance fees or 100% of the annual site lease for leasehold tenure. TDS is the percentage of gross income that will be used for payments of principal, interest, taxes and heat and other debt obligations, such as car payments or payments of other loans.
Open Mortgage – Allows payment of the principal in part or in full at any time without penalty. Open mortgages tend to be for a short term-usally six months or a year
Closed Mortgage – Locks you into a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of the term.
Portable and assumable mortgages – If you plan to move during your mortgage term, you can sometimes take your mortgage with you—or have a buyer assume it—saving penalty costs.
Property Appraisal – An appraisal is required by a lender to determine the property value for lending purposes. Different lenders have varying requirements, and an appraisal for personal purposes may not be accepted by a lender. Some lenders require an appraisal when the mortgage value is less than or equal to 80% of the suggested property value. In some cases, even mortgages as low as 20% of the property value may require an appraisal. Certain lenders use automated valuation models (AVMs). If the AVM supports the submitted value, an appraisal may not be necessary. High-ratio mortgages (where the down payment is less than 20%) rarely require appraisals since mortgage default insurance is involved, i.e. through CMHC. Lenders closely examine MLS listings and property details. Any remarks that suggest potential issues—such as structural problems or unique property characteristics—may trigger an appraisal request.
For any questions and more information please reach out and we can answer your questions or put you in touch with experienced mortgage professionals.