This week we are going to take a look at the terms you will see and hear most often when it comes to your mortgage. The process can feel overwhelming but having these basics in mind will serve you very well no matter if it is you first or fifth home.
Pre-approval. Mortgage pre-approval qualifies an individual for a specific loan amount before he or she begins to look for houses, based on how much money the lender is willing to lend to the borrower.
It also guarantees their mortgage at the current interest rate for a period of 120 days. Ensure you have a fully underwritten pre-approval NOT just a rate hold!
Insured/high-ratio mortgage. A high-ratio mortgage is one that is more than 80% of the home’s value (the lesser of purchase price of appraised value), up to 95%.
This type of mortgage must be insured against borrow default. The insurance premium may be added to the loan or paid in advance.
Mortgage insurance. Mortgage insurance is required by the lender on a high-ratio mortgage. In the event that a borrower defaults on their loan, mortgage insurance protects the lender. There are two mortgage insurers in Canada: Canadian Mortgage and Housing Corporation (CMHC) and Genworth.
Conventional mortgage. This common type of mortgage loan does not exceed 80% of the property value (the lesser of the purchase price or the appraised value). For this type of mortgage, you must have a minimum of 20% for a down payment.
Sources of down payment. Homebuyers may make their down payment from a variety of sources, including but not limited to your savings, RRSP withdrawal, gifted funds from family, proceeds from the sale of another property, funds borrowed against proven assets, cash back from lender or borrowed funds.
Term – a mortgage term is the length of time for which a mortgage agreement exists between a borrower and a lender. Mortgage terms generally range anywhere from six months to 10 years. This is the period of time an interest rate is fixed, after which the borrower must either repay the remaining balance or renegotiate with the lender.
Variable rate. A variable rate mortgage is one in which payments are fixed but the interest rate will fluctuate with changes in the Prime Rate. When rates go up, a larger portion of the payment goes toward interest. When rates go down, more of the payment goes toward principal.
Fixed rate. In a fixed rate mortgage, the interest rate is fixed for a specific amount of time. This period of time (the mortgage term) can range anywhere from six months to 10 years. Over the course of the mortgage, less of the payment counts toward interest, and more toward the principal.
Amortization period. This is the period of time that it will take for you to repay your mortgage in full, typically ranging from 15 to 25 years.
A longer amortization period will result in lower payments, but you’ll also end up paying more in interest over the length of the mortgage. A shorter period results in less interest paid as well as higher payments. It’s wise to choose the shortest amortization period you can afford.
Payment schedule. This is the frequency at which the homeowner makes their mortgage payments.
Payment options include monthly, semi-monthly (twice a month), bi-weekly (every other week) and weekly payments. More frequent payments generally results in lower interest costs over the life of your mortgage and can shorten your mortgage term significantly.
Portability. Should a homeowner decide to move, a portable mortgage allows the homeowner to carry over their current mortgage conditions to their new home.
Pre-payment privileges. Certain mortgage products allow the homeowner to make mortgage payments on top of their regular mortgage payments without a penalty.
These additional payments may include doubling up on a monthly payment, increasing monthly payments and paying off part of their mortgage principal up to a certain percentage.
Pre-payment penalties. Certain mortgage products penalize the homeowner for paying off their mortgage early. Typically, the penalty is equal to three months of interest or the interest rate differential whichever is greater.
Second mortgage. A second mortgage is an additional mortgage on a property that is already mortgaged.
There you have it! Mortgage terminology 101.
Pam Pikkert is a mortgage broker with Mortgage Alliance – Regional Mortgage Group in Red Deer.