Nillsson-Gundersen Realty - Mortgage Terms

If you've been waiting for housing prices to hit bottom before purchasing your first - or next - home, there is no time like now. According to the experts, the cost of buying a home today is as affordable as it has been anytime since the 1970s.

The large selection of houses on the market, coupled with low interest rates and several government programs designed to make home ownership easier, have created a buyer's market.

Once you've selected the house you want, or the area you want to live in, you'll need to review your current expenses to see how much you can afford. To do this you must calculate your total debt-service ratio.

Your debt ratio gives lenders an idea of how much you can afford to pay each month. It includes mortgage payments, taxes and utility bills, plus any outstanding loans, unpaid credit card balances or car loans. As a general rule of thumb, lenders will not lend you money if the ratio is more than 32 percent of your total income.

When it comes to finding a mortgage, you're probably in good shape because the Canadian mortgage industry is presently one of the most competitive industries in the country.

Use this fact to your advantage by being selective about who's going to carry your mortgage. Although you may feel a sense of loyalty to your bank, don't let that
feeling cloud your financial judgement.

Banks are not in business to make you happy. They are in business to make money, and, for themost part, their loyalty extends only as far as your financial worth. So shop around and make sure you're getting the lowest possible rate.

You may want to begin the process by contacting an independent mortgage broker. Aside from helping you determine what you can afford, a broker will also offer the widest range of mortgage options. Independent brokers have ties to many financial institutions, allowing them to shop the market to get the best rates possible. If one institution turns you down, your broker will try another.

When it comes to mortgages, you have a number of choices. You can opt for a conventional or high-ratio mortgage, closed or open, fixed rate or variable rate, or even specialty mortgages that attempt to provide the best of all worlds.

A conventional mortgage can be obtained from any bank and covers up to 75 per cent of the assessed value of the property. High-ratio mortgages, on the other hand, cover more than 75 per cent of the value and, because of the higher risk, must be insured through the Canada Mortgage and Housing Corporation (CMHC). The added cost of insuring a high-ratio mortgage is added to your monthly mortgage payments.

Closed mortgages offer lower interest rates than open mortgages but generally have the disadvantage of not allowing you to contribute extra money over and above your regular monthly payments. Open mortgages allow you to pay off the loan as quickly as you want with no penalties.

The term of the mortgage loan is not set in stone but is a matter of preference.

Short-term mortgages are good if you think interest rates are likely to fall in a few years.

Right now, however, a long-term mortgage may be a better bet as it's unlikely that rates will fall much further. Long-term mortgages are also better for budgeting purposes, because they allow you to plan for years in advance.

Remember, though, that the longer the term you select, the greater the amount of interest you will pay.

A letter from your employer stating your salary and how long you have been employed
If you're self-employed, you'll need to present your financial statements for the past three years as well as tax returns.
A list of assets, debts, credit cards and bank accounts, with account numbers.
A letter confirming that you will raise your own down payment.
A copy of the real-estate listing if you are buying an existing home.
If you plan to build a new home, a picture of the property and a copy of the building plans.
A mortgage is probably the biggest investment you will ever make. You owe it to yourself to spend the time to get it right. Remember, this is not just an investment, it's your home.

A very import part of purchasing a home is finding the right lender. Below are some of the characteristics that you should look for when choosing a lender. Also, things to be aware of when choosing a lender.

What is his/her reputation in the community. How many loans do they close each year?
Is the company known in the area? How long has the company been in business?
Does the lender have access to a wide variety of loan packages?
Can the interest rates be locked in and for how long?

Quoted rates over the phone are rarely locked prices. This is one way the lender gets you to come to his office. Rates can be subject to changes unless they are predetermined a the specific period of time.
Interest rates can change daily. A quote you get today may not be available at the same price tomorrow.
The interest you are quoted over the phone may not be a program that will fit your needs or situation.
Many lenders will discount their posted rates for well-qualified customers

Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is a mortgage that can vary (up or down) over the life of the loan in relationship to changes in an index such as bank prime. (ARMs are sometimes called variable rate mortgages). Typically, the initial mortgage interest rate on ARMs are lower than those for fixed rate mortgages; however, over time, since rates on ARMs can vary over the life of the mortgage, a fixed rate loan may eventually have a lower interest rate. Your mortgage professional can provide you with details regarding the mortgage programs that are available.

Administration Fee
A fee charged by the broker or lender to initiate a proposal for a mortgage.

Amortization
Mortgage loans are amortized when they are repaid in equal payments consisting of principal and interest. Over time, as the mortgage is repaid, the outstanding portion of the debt is reduced and the equity increases. In the early years of the mortgage, the largest portion of the mortgage payment pays the interest on the loan and the smallest portion pays back the loan principal; in the later years of the loan, the reverse is true.

Annual Cost Of Borrowing
The interest, and all loan arranging costs including appraisal fees, legal fees, title insurance and other fees as they may apply to the loan arranged, when expressed as a percentage of the amount loaned.

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Appraisal
The process of determining the value of the property, usually for lending purposes.

Blended Payments
Equal payments consisting of both a principal and interest component, paid each month during the term of the mortgage. The principal portion increases with each payment, while the interest portion decreases, but the total monthly payment does not change.

Bonus
These are charges the borrower pays to the lender and each point is equal to 1% of the mortgage amount. Bonuses are charged to increase the yield on the mortgage.

Cap (Rate Cap, Capped Rate)
A cap refers to the limit on how much an interest rate can change at an adjustment period, or over the life of the loan. Often a builder will arrange with a lender or mortgage broker for a capped rate program in order to offer consumers an interest rate worry free mortgage commitment when they purchase a new home. This can be particularly attractive to a new home buyer because of the time lag between the purchase and completion of construction where upon the purchaser can actually close and move in.

Closing Costs
Closing costs include all of the fees, such as lawyers fees, appraisal fees, inspections, insurance, title search, taxes, sales tax, GST, legal disbursements, etc. that a borrower is required to pay to obtain a mortgage and close a purchase or refinance.

Certificate Of Location
A document specifying the exact location of the property and describing the type and size of the house including additions.

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Certificate of Search
A document verifying the transactions registered against the property - e.g. sales, mortgages, etc.

Conditional Offer
An Offer to Purchase subject to conditions. These conditions could be the arranging of a mortgage, or the selling of an existing home. Usually a time limit in which the specified conditions must be satisfied is stipulated.

Debt-Service Ratio
The percentage of the borrower's gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees.

Deed (Certificate of Ownership)
The final document prepared by the lawyer or notary to be signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of buyer's ownership.

Deposit
A sum of money deposited in trust by the buyer on making an offer to be held by the seller's agent, broker, lawyer or notary until the closing of the sale.

Down Payment
The down payment is a percentage of the agreed upon selling price that the buyer is required to pay in cash and may not be borrowed from the lender. The down payment, when added to the mortgage, equals the purchase price of the residence.

Equity
The value of a residence minus the unpaid portion of the mortgage and less any other outstanding amounts (such as a second mortgage, a lien, etc).

Escrow Deposit
If your lender is scheduled to pay property taxes, insurance, etc. on your behalf, the borrower must place funds in an escrow account to pay the required amounts. Typically, the borrower places funds in this account as part of the monthly mortgage payment

Fixed Rate Mortgage
A mortgage that has a fixed interest rate for a specified period of time, usually 1 to 10 years.

Fire Insurance
Before a mortgage transaction can be closed, the mortgagor must have fire insurance arranged and in effect. A certificate from the insurance company may be required at the closing.

Holdback
An amount of money withheld by the lender during the progress of construction of a house to ensure that construction is satisfactory at every stage. The amount of holdback is generally equivalent to the estimated cost to complete construction plus any money required by law such as the 10% holdback in accordance with the construction liens act in Ontario, Canada.

House Inspection
The examination of the house by an expert (qualified home inspector) selected by the buyer.

Lien
A claim placed on property to satisfy an unpaid debt (such as a construction lien).

Loan Commitment
A letter issued by the lender; the lender agrees to make the loan to the borrower and sets forth the terms upon which the loan will be granted.

Loan-To-Value
The ratio of the mortgage divided by the appraised value of the home; lenders use this ratio to help determine the maximum amount of a mortgage loan that will be granted.

Mortgage
A lien placed on a real estate to secure repayment of money borrowed .

Mortgage Insurance Premium
A premium which is added to the mortgage and paid by the borrower over the life of the mortgage. The mortgage insurance insures the lender against loss in case of default on the part of the borrower. Mortgage Insurance is provided to the lender by CMHC or GE.

Mortgage Life Insurance
A form of reducing term insurance recommended for all mortgagors. In the event of the death of the owner or one of the owners, the insurance pays the balance owing on the mortgage. The intent is to protect survivors from losing their home.

Mortgagor
Legal name for the borrower

Mortgage Renewal
A mortgage loan where the interest rate is established for a specific term. At the end of this term, the mortgage is said to ìroll-overî and the borrower and lender may agree to extend the loan. If satisfactory terms cannot be agreed upon, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing.

Option Agreement
A document stipulating that, in exchange for the payment of a deposit, a specific individual is to be given first chance buy a property within a specified period of time. If the option-holder does not buy within the specified period of time, he loses his deposit.

PITI
Acronym used to represent principal, interest, taxes and insurance. The combination of these items is used by lenders to determine the borrowers projected housing costs.

Prepayment Option
The right to prepay specified amounts of the principal balance. Prepayment charges may be incurred on prepayment options.

Repayment Charge
A sum of money paid to the lender by the borrower for the privilege of prepaying a mortgage in part or in full.

Second Mortgage
This is usually at a higher interest rate and represents the difference between the appraised value of the house and first mortgage financing plus the downpayment or equity. May be obtained from banks and finance companies or through lawyers or notaries. Second mortgages are available up to 90% of value for residential property and less for investment or ICI property. In addition there are various lenders who offer second mortgages so different rules and requirements will apply in different circumstances. You can rely on your mortgage consultant for advice regarding a second mortgage.

Term
The length of time during which the agreement exists. A mortgage may be amortized over a long period (such as 25 years) with a shorter term (six months to five years or more). After the term expires, the balance of the principal then owing on the mortgage can be repaid or a new term can be entered into at the then current interest rates by renewing the mortgage or refinancing.

Title
When the ownership of a residence is transferred from the seller to the buyer via a document called a deed. The persons or company named on the deed hold "title" to the property.

Title Insurance
Protects lenders and borrowers against financial loss which may result from legal defects in the Title, or other claims against the Title.

Vendor Financing (Balance of Sale)
The vendor sometimes takes back a mortgage in order to facilitate a sale.

Zoning Laws
Municipal laws restricting or designating the use of land for specific purposes.

To obtain more information please choose:

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