Most Common Mortgage Terms Explained
Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific sector, and the mortgage business is no exception.
To help you understand the terms, acronyms, and phrases regularly used when purchasing a home, Mortgage With Vadim has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your mortgage needs effectively.
Variable Rate Mortgage: With a variable mortgage, your mortgage rate will move in conjunction with your lender’s Prime lending rate, which tracks the Bank of Canada’s benchmark rate, and will typically get quoted as Prime minus a specified percentage. It can be challenging to predict our economic future, so you won’t know for sure what kind of ups and downs might be ahead of you.
Fixed Rate Mortgage: With a fixed-rate mortgage, your payments get fixed for the mortgage term, which offers stability. Fixed rates are usually better suited to first-time buyers or those who haven’t owned a home for a very long period. Ask yourself these two questions: Do you prefer to know your actual payment over a more extended period? Do you want to avoid the need to watch rates? If you answered “yes,” a fixed-rate mortgage could be the best option.
Closing Costs: Expenses you will pay at the end of the deal are associated with the purchase/refinance of a property. These costs can include legal fees and appraisal fees.
Open Mortgage: An open mortgage is one with flexible options to increase your repayments, although it will be at a higher rate than a closed mortgage. However, you can pay off your mortgage either fully or partially at any time with no penalty with an open mortgage. This option is less common in Canada and gets used when the client expects to receive additional cash to pay off the mortgage.
Closed Mortgage: A closed mortgage locks in a mortgage rate and will not fluctuate if the Bank of Canada changes its rate. The most common term for a closed mortgage is five years. In Canada, closed mortgages are most popular as they offer lower interest rates, and most people don’t need the extra flexibility of an open mortgage.
Refinancing: It’s the process of paying out the existing mortgage to establish a new mortgage on the same property under new terms and conditions. The main reason for refinancing is usually when a client requires additional funds. Accessing home equity through refinancing (min 20% home equity) has been an easy, low-cost way to get much-needed funds for years. While various new mortgage rules and “stress-testing” has made refinancing more complicated, it’s a strategy that continues to make sound financial sense for homeowners that qualify.
Qualifying rate: The rate a lender uses when determining if you qualify for a mortgage. It will vary depending if your mortgage is a high ratio (less than 20% equity/downpayment) or conventional (more than 20% equity/downpayment). The qualifying rate will be higher than your actual mortgage rate (a situation that some may find frustrating). But rest assured that your actual payments will be based on the lower mortgage contract rate.
Amortization/Term of the Mortgage: Amortization is the length of time that it takes you to pay off your entire mortgage (usually twenty-five or thirty years). The term means the period you are committed to a mortgage rate, lender, and conditions set out by a specific lender (e.g., one or five years).
Pre-approval: A mortgage pre-approval can be essential to your pathway to building wealth. It gives a real-world picture of opportunities and limitations. A mortgage pre-approval will tell you how much you qualify for, what your mortgage payments will be, and you’ll also receive an interest rate that will get held for a specific period, e.g., a hundred and twenty days. If you purchase a new home, you’ll be shopping with a full wallet and will know what you can afford to spend.
Conditional on financing: When you find the condo or house of your dreams and want to make an offer, you will need a financing condition unless you can pay cash for the home. That little phrase – “conditional on financing” – is a critical protection for buyers.
When an offer to purchase is made with “conditional on financing,” your lender will gain the time needed, i.e., three to five days, to ensure that you get fully approved for the necessary funds. Remember, your lender needs to feel as comfortable about the property as you and will likely conduct an assessment. After all, the property is the lender’s security if something goes wrong. An offer without conditions leaves you and your family in a tight spot. For example, if the financing falls through, you will lose your deposit and could get sued by the seller. It’s not the happily-ever-after scenario you envisioned when you made your offer, so be proactive.
Mortgage Penalties: It’s the cost to break your mortgage. Most homeowners should expect to pay a penalty if they want to break their mortgage to get a better rate or to opt for a complete refinance. Homeowners in five-year fixed mortgages often look to break their mortgage during their 3rd year for debt consolidation or to accommodate changing life circumstances.
The penalty for breaking a mortgage is typically the greater of:
• three months’ interest, or
• the interest-rate differential (IRD).
With the IRD, your mortgage lender will want you to pay the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates. Unfortunately, not all lenders calculate IRD the same way, so you should always get the actual penalty from your lender.
Get in touch with us today!
If you’re looking for a mortgage broker, contact the experts at Mortgage With Vadim. We specialize in first-time home buyer mortgages, debt consolidation, renewals, and mortgage refinancing.
We serve clients across Vaughan, Toronto, Richmond Hill, Markham, Newmarket, Mississauga, Milton, Oakville, Burlington, North York, Etobicoke, Kleinburg, Scarborough, East York, North Toronto, GTA, and the surrounding areas.
Please view our complete list of services here, or call us at (416) 894-5315. Alternatively, you can email mostovoyvadim@gmail.com.