Mortgage Glossary
We have put together some basic information on mortgage
terminology, mortgage costs and some tips on how to make an
informed decision on your mortgage needs. While this is not an
all-inclusive list, we hope it will help you find the right
mortgage for your needs.
Amortization: A mortgage is amortized over a period of
years. This amortization period is the length of time it takes to
pay off the mortgage in full. The usual amortization period is 25
years, however, this can be accelerated to pay off the mortgage
more quickly or in some cases can be stretched to 35 years to
reduce the monthly payment.
Assumable: Some mortgages are assumable with qualification.
This means that should you sell your house before the term of the
mortgage is completed, the purchaser can take over your mortgage
if they qualify. This allows you to avoid paying a penalty to
break your mortgage.
Blend & Increase: The ability to increase your existing
mortgage or the term of the mortgage, with only the increased
amount or term at today's interest rate. The interest rate for the
existing mortgage is combined or blended with the interest rate of
the increased amount. This is advantageous if you have a good rate
on your existing mortgage or if you want to avoid a penalty to pay
out an existing mortgage.
Commitment Letter: This is the document that your lender
will confirm the basic terms and conditions upon which the lender
will provide the mortgage and indicate the conditions that must be
met before funding. The standard conditions include but are not
limited to receipt of an appraisal, income verification by way of
employment letters and income tax returns, as well as verification
that the purchasers downpayment has not been borrowed.
Discharge: For reasons, planned or unplanned, the borrower
may need to sell before the end of the mortgage term. Discharge
fees vary widely between lenders which may result in thousands of
dollars in penalties. Worse yet, if the discharge policy is "No
Discharge", the borrower may be locked in for the entire term of
the mortgage.
Early Pay-out Penalty: Many people don't think about
breaking their mortgage when they are in the midst of arranging
it, however, this possibility cannot be overlooked. An
individual's circumstances can change - transfer of employment,
marriage breakdown, etc. Some mortgages are fully closed and
cannot be broken under any circumstance. Other mortgages have a
sales clause allowing for early payout of the mortgage upon an
arms-length sale of the property, subject to a penalty (for
example, three months interest). Some mortgages allow the borrower
to break the mortgage, for any reason, upon payment of a penalty.
Interest Adjustment Date: This may apply to mortgages that
close on any day other than the requested day of payment. For
instance: since some lenders want monthly payments to be made on
the first day of the month, they will adjust the interest due on
closing so that interest on your mortgage is paid up until the
first of the coming month. If you close on the 20th of the month
(and the month has 30 days), you will have to pay interest for 10
days so that you are paid up until the first of the coming month.
Then your first full mortgage payment will be due on the first of
the following month.
Interest Rate: The rate of interest is a key consideration
when arranging your mortgage. The interest is the payment to the
lender for the use of the mortgage money.
The interest rate can be fixed (where the rate remains constant
for the term) or floating (where the rate changes at regular
intervals). Short term or convertible terms usually have lower
interest rates and can be used to a borrower's advantage in an
unstable market. These mortgages allow you to ride out a
fluctuating or falling rate market until rates reach a level where
you wish to "lock-in" to a longer term. On the other hand, long
term rates offer stability and eliminate the need to monitor rates
daily.
Interim Financing: When the purchase of your new home
closes in 60 days but the sale of your current home closes in 90
days, you will need interim or bridge financing. This is because
for 30 days, you will own both properties, and of course, not
receive the equity out of your old property. If the lender you
choose cannot provide you with interim financing, you may find
getting it from other lenders will be very expensive.
Mortgage: A contract between a borrower and a lender, where
the borrower pledges a property to a creditor as security for the
payment of a debt. "Charge" is another word for mortgage.
Mortgage Life Insurance: Life insurance that pays off the
balance of the mortgage in the case of the borrowers death (i.e.,
if a spouse dies, the remaining spouse would not have to worry
about mortgage payments - it would be paid in full). The monthly
cost of getting this insurance through the lender is typically
less costly than similar coverage obtained directly from an
insurance company.
Payment frequency options: You will often have the choice
of making payments on your mortgage on a monthly, semi-monthly,
bi-weekly or weekly basis. Increasing the payment frequency, i.e.,
bi-weekly instead of monthly, can shorten the amortization of your
mortgage and save you a considerable amount of interest.
Pre-authorized chequing/debit: In this computer age,
mortgage payments are normally made by pre-authorized chequing or
debit where the lender takes your regular monthly, semi-monthly,
bi-weekly, or weekly payment out of a predetermined bank account
automatically.
Prepayment privileges: These prepayment privileges allow
you to make extra lump sum payments, double your payments or
increase your regular payments. Prepayment privileges vary from
lender to lender. If you want to be able to pay your mortgage off
quickly, check the flexibility of your prepayment privileges.
Portable: If you have a good mortgage rate and a number of
years remaining on your term, you may want to take your mortgage
with you to a new home when you move. This can be done if the
mortgage is portable. The property you are moving to will have to
be reviewed and approved by the lender before you can "move" the
mortgage to the new property.
Rate Guarantee: The period of time, prior to closing of
your house purchase ("the completion date") that a lender will
guarantee that the interest rate they have offered will not rise.
This is usually for a period between 60 and 90 days - although
longer rate holds are available under special conditions. The
commitment letter will also state under what conditions (if any)
that they will decrease the interest rate if and when rates in
general drop prior to your completion date.
Standard mortgage fees: All mortgages have standard fees
associated with them such as renewal fees, discharge fees, NSF
fees, etc., These vary from lender to lender and should be
considered.
Tax holdback: When property taxes are included with your
mortgage payments, your lender will hold back funds from your
mortgage proceeds to cover interim or final property taxes payable
to the municipality. The amount depends on the month the mortgage
was funded and on the dates when interim and final taxes are due.
Holdbacks are used to pay for the current year's taxes, while your
monthly tax installments are accumulated in the account to pay for
the next year's taxes.
Term: This is the period of time that the interest rate and
the loan is contracted for. Terms can vary from 3 months to 35
years (alhtough the standard term is still 25 years)
