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The ABC's of Mortgages

RESOURCE Author: Kam Brar

Here are some very common mortgage terms and expressions you are bound to hear throughout the mortgage process.

AMORTIZATION PERIOD: The actual number of years it will take to pay back your mortgage loan. Currently in Canada, the amortization does not exceed 40 years.

APPRAISED VALUE: An up to date estimate of the value of the property, conducted by a certified appraiser. This appraisal should not be confused with what is commonly know as a “CMA” (Current Market Analysis) which is often conducted by a licensed realtor in order to establish a list price for a property. Nor should it be confused with a building inspection, which is used to determine the overall condition of a property.

ARMS LENGTH: A transaction between unrelated entities where a willing seller (the seller is not compelled to sell) transacts with a willing buyer (the buyer is not compelled to buy).

ASSESSED VALUE: The value placed on land and buildings by a government agency for tax assessment purposes.

ASSESSMENT: A tax or charge levied on property by a taxing authority to pay for improvements such as sidewalks, streets, and sewers.

ASSUMABILITY: Allows the buyer to take over the seller’s mortgage on the property. BLENDED MORTGAGE: A mortgage that takes an existing mortgage and adds to it additional funds being advanced. The interest rate is a combination of the rate on the existing mortgage and current rates in effect at the time of the new financing.

BRIDGE FINANCING: This is interim financing to bridge the time gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.

CLOSED MORTGAGE: A mortgage that locks you into a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of a closed term.

COMPOUND PERIOD: The number of times per year in which the interest rate is compounded. In Canada, mortgages are generally compounded semi-annually which is twice per year.

CONDOMINIUM FEE: A shared payment among owners which is allocated to pay expenses associated with the entire property or development as a whole. Also know as strata fees.

CONVENTIONAL MORTGAGE: A mortgage loan issued for up to 80% of the property’s appraised value or purchase price, whichever is less.

DOWN PAYMENT: The buyer’s cash payment towards the purchase of the property. This payment can be from a purchaser’s own resources or a gifted down payment as well, or be comprised of a combination of the two.

EQUITY: The difference between the price for which a property is sold, could by sold or is appraised for, less the total debt registered against the property. This difference between the two numbers is the owner’s equity.

EFFECTIVE INTEREST RATE: This is the actual interest rate paid on a loan or mortgage. In Canada, mortgages typically have a higher effective interest rate because of the fact that interest rates are compounded semi-annually or twice per year. In Canada, effective interest rates have to be disclosed to the borrower.

FIRST MORTGAGE: The first mortgage in the mortgage agreement that is considered to be in first place, and will have first claim on assets in the event of any default. This is not necessarily the largest mortgage, but rather, the one that is registered first against the title.

FIXED RATE MORTGAGE: A mortgage in which the rate of interest has been fixed for a specific period of time. This specific period of time is generally known as the term of the mortgage.

GDS RATIO (Gross Debt Service Ratio): The percentage of gross annual income required to cover payments associated with housing. Housing payments include mortgage principal, interest, property taxes and sometimes include secondary financing, heating, condominium fees or pad rent.

HIGH-RATIO MORTGAGE: A mortgage that exceeds 80% of the home’s appraised value or purchase price, which ever is lower. These mortgages must be insured for payment to protect the lenders.

INTER ALIA MORTGAGE: “Inter Alia” also known as a blanket mortgage. An Inter Alia Mortgage is a mortgage that is secured by more than one property. A single mortgage document is executed and registered against each property that is used as security.

INTEREST RATE: The value charged by the lender for the use of the lender’s money, this rate is commonly expressed as a percentage rate.

LOAN TO VALUE RATIO: The ratio of the loan to the appraised value or purchase price of the property, whichever is lower. For example, if you purchased a home for $400,000 and it appraised for the same, and you needed a mortgage for $200,000 that would be a 50% loan to value ratio.

LOC: LOC is short for line of credit. There are two distinct types of lines of credit, secured and unsecured. Generally most mortgage lenders grant secured lines of credit, which use the property as additional security.

MATURITY DATE: The end of the term, at which time you can pay off the mortgage or renew it generally without any penalty.

MORTGAGEE: The party who advances the funds for a mortgage loan, in other words, the lender.

MORTGAGE INSURANCE: Applies to high-ratio mortgages. It protects the lender against loss if the borrower is unable to repay the mortgage. Again, this only generally applies to high ratio loans with a loan to value of over 80%.

MORTGAGE LIFE INSURANCE: Pays off the mortgage in full if any or all of the borrowers die. MORTGAGOR: One who gives a mortgage as security for a loan, in other words, the borrower.

NOMINAL INTEREST RATE: An interest rate which does not necessarily correspond to the effective interest rate. In Canada, these two rates do not correspond.

OPEN MORTGAGE: Allows partial or full repayment of the principal at any time, without penalty.

OSB – (Outstanding balance): The amount of principal which is still outstanding at the end of the term, or at any point in time during the mortgage.

PRE-APPROVED MORTGAGE: Qualifies you for a mortgage before you start shopping. You know exactly how much you can spend and are free to make a “firm” offer when you find the right home. Even with pre-approvals, it’s generally recommended that any and all offers for the purchase of a subject property be made with a “subject to financing” clause.

PORTABILITY: The ability to transfer your mortgage, including rate and terms, from your existing property to a new property.

PREPAYMENT CLAUSE: A clause in a mortgage agreement that allows you to pay off all or a percentage of the mortgage, before the maturity date, without incurring any penalty to do so.

PREPAYMENT PENALTY: A fee charged by a lender when the borrower prepays all or a part of a mortgage in excess of the regular payments and prepayment privileges allowed by the mortgage terms of the existing mortgage.

PREPAYMENT PRIVILEGES: Voluntary payments in addition to regular mortgage payments, these vary by lender and institution.

PRINCIPAL: The amount borrowed or still owing on a mortgage loan. Interest is paid on the principal amount.

PROPERTY TRANSFER TAX: A fee paid to the municipal and/or provincial government for the transferring of property from seller to buyer. In British Columbia, it’s currently 1% of the first $200, 000 and 2% on the remainder. For first time buyers in BC, there is a full exemption, where the fair market value of the land and improvements which comprise the principal residence do not exceed the qualifying value of $375,000. Also, if the fair market value of the land and improvements which comprise the principal residence exceeds the applicable qualifying value by an amount not greater than $25,000, a proportionate exemption is available. Click here for more information.

RATE COMMITMENT: A lender’s commitment to offer to hold a specific rate for a certain length of time. Rate commitments or rate holds can vary from 30 to 180 days depending again on the lender and institution.

REFINANCING: Paying off the existing mortgage and arranging a new one or re-negotiating the terms and conditions of an existing mortgage.

RENEWAL: Re-negotiation of a mortgage loan at the end of a term for a new term.

SECOND MORTGAGE: Secondary or additional financing, usually has a shorter term and higher interest rate than the first mortgage. The primary reason for this is, that the secondary lender usually has increased risk, as the loan to value ratio increases with additional financing.

STRATA FEE: A charge (usually monthly) by a Strata Corporation to cover the costs of maintenance, repair, cleaning etc. of common areas. This fee will usually include a reserve to cover major repairs such as re-roofing and heating system replacement.

TAX HOLD BACK: When your property taxes are included with your mortgage payments, your lender will

Contact Information | Auxilium Mortgage Corporation
Name:	Kam Brar
Company:	Auxilium Mortgage Corporation
City:	Victoria
Province:	British Columbia
Country:	Canada
Phone:	250-590-6520
Email:	Email
Website:	http://www.kamthemortgageman.com