If you are a homeowner, or you are a first-time homebuyer, it is important to know at least a few common terms used when talking about mortgages. While you may not need to talk about mortgages very often, you can expect to have a conversation about your mortgage at least every five to ten years when your mortgage is up for renewal. That’s frequent enough for you to need to understand the more common mortgage terms and concepts.
In order to choose the right mortgage, you will need to learn a bit of mortgage jargon. Why? So that, when your mortgage broker asks you a question, you know what they are talking about. While you may not need to know everything there is to know about mortgages, learning a few of these terms below is a great start when jumping into the real estate market.
What is an adjustable-rate mortgage?
This is a type of mortgage where the interest rate fluctuates periodically based on bank prime rates. It is also known as a variable-rate mortgage.
What does amortization mean?
You may hear your mortgage lender talk about the amortization period of your mortgage. This is the duration of the loan re-payment. The amortization period is calculated by equal continual payments to pay off the outstanding debt at the end of a fixed period. Including accrued interest and principal on the unpaid balance.
What is an appraisal and what does it have to do with a mortgage?
An appraisal is the estimate of the value of a property you want to secure a mortgage for. It is completed by an appraiser who assesses the property to determine its value. The value is determined by either a direct comparison, cost, or income approach.
What is an assumable loan?
An assumable mortgage or loan is one that can be taken over or transferred to another buyer. It is a legal agreement that involves the purchaser and the vendor (the seller of the home). The purchaser assumes the payments on an existing mortgage from the vendor. This can be a great opportunity for the purchaser because you can save money since there are little to no closing costs when buying the home this way.
What is a closing?
Your closing is the final step in the mortgage process. It is when the purchaser, vendor, and lender meet and legally exchange property, title ownership, and money. Typically the closing is done by a real estate lawyer, who then gives you, the new homeowner the keys the day that the home officially becomes your own.
What is considered a closing cost?
When closing the sale of a house, there are costs involved when obtaining financing. These costs include appraisal fees, legal fees, and transfer taxes. All of which are needed in order to complete the sale of a property.
What does it mean to default on a mortgage payment?
When a person defaults on their mortgage, it means they have failed to meet the legal obligations of their mortgage contract. More specifically, it is when they don’t make their regularly scheduled mortgage payments.
What is home equity?
Equity is the value of a homeowner’s interest in their property. In other words, it is the difference between what you owe on your mortgage and what your property is currently worth. For example, if you owe $500,000 on your mortgage and your property is worth $600,000, you have $100,000 of equity in your home.
To learn more about home equity and how you can use a home equity loan, check out one of my earlier articles here.
What is a fixed-rate mortgage?
Unlike the adjustable-rate mortgage, a fixed-rate mortgage is where the interest rate is set for a specific period of time. The rate cannot fluctuate, and a set payment is made and agreed upon between the mortgage lender and borrower.
To better understand the difference between a fixed-rate and a variable-rate mortgage, along with the other types of mortgages in Canada, click here for more information.
What is a lien and what does that have to do with mortgages?
A lien is a legal entitlement that is secured against a property for outstanding payment of a debt or obligation. It is a legal right or claim against a property by a creditor. Liens are commonly placed against a property, such as homes and cars, so that creditors, such as banks and credit unions, can collect what is owed to them. When you apply for a mortgage, the mortgage lender wants to make sure that there are no liens on the property which would detract from the value of the home in which they lend you the funds to purchase.
How long is a mortgage term and what is it?
The term on your mortgage is the number of years it will take for you to pay off your mortgage if you make your minimum payments. Typically, a mortgage term is 25-30 years long. As you pay off your mortgage, your mortgage term shortens accordingly.
What is a mortgage’s principal amount?
The principal is the amount of money borrowed and owed on a mortgage. It is the financial obligation still left on a mortgage, not including interest that has accrued or been paid.
What does PITI stand for?
PITI is an abbreviation for principal, interest, taxes, and insurance, which is the total amount for a mortgage overall.
What does prepayment mean in relation to your mortgage?
A prepayment is when a mortgage lender allows a borrower to make additional payments that are not set within their usual payment schedule. For example, if your regular monthly mortgage payment is $1000 each month but, partway through the year, you have gifted a lump sum of money, you can put that money down on your mortgage to prepay part of your mortgage loan outside of your regular mortgage payments.
When is there a prepayment penalty and why would I pay one?
If you decide you want to make a lump-sum payment on your mortgage, or you want to pay off the remaining principal on your mortgage, lenders may charge you a prepayment penalty for paying off the loan sooner than the terms call for. Some mortgages allow you to prepay a percentage of your mortgage in a lump sum on an annual basis however, others do not. How much you owe may depend on your mortgage contract and what type of mortgage you have, along with how much is still owing in terms of the mortgage principal.
Principal and Interest, what are they?
There is a portion of your monthly mortgage payment that goes to paying interest, and another portion goes toward paying the principal. As each payment is made it reduces the outstanding balance of your overall mortgage loan.
What does it mean to refinance your mortgage?
Remember earlier when we were talking about home equity? Refinancing a mortgage allows you to tap into that home equity and use it to pay off a pre-existing loan or to fund renovations on the home, using the original property as collateral. You might also refinance your mortgage to take advantage of lower interest rates.
What is a title in relation to a property you want to secure a mortgage on?
A title is an official document that formally states who owns a piece of property. It provides ownership verification of an individual’s property making sure the person who is selling the property is the true owner and is authorized to sell it.
What does underwriting mean?
Underwriting is the process of evaluating a borrower’s creditworthiness before approving an application for a mortgage.
What is a warranty deed?
A warranty deed is a document that states there are no pre-existing liens on the property so the owner can sell the property to the buyer.
Ready to talk about YOUR mortgage? I’m here for you!
If you’re ready to talk about your current mortgage or about getting pre-approved for the mortgage you need, I’m your guy! With over 10+ years of experience as a Barrie mortgage broker, you could say I’m an expert in the craft. Whether you’re looking to refinance your mortgage for a renovation, or you’re a first-time homebuyer looking to get into the market, I can help. To get started, you can fill out your mortgage application here, or just give me a call at 705-315-0516 to schedule a meeting with me in person or virtually.
Whatever your mortgage questions are, I’m here to answer them.