Mortgage Dictionary – Common Terms

December 22, 2008  
Filed under Mortgage Dictionary

The following are some common terms used in the mortgage industry that could be confusing.

Adjustable Rate Mortgage: Also known as an ARM, this is a mortgage where the payments change and the interest rate is periodically adjusted based on an index (in Canada, the index is the prime lending rate).

Amortization Period: The number of years it will take to pay down the principal balance of your mortgage. The most common amortization period is 25 years, however you can choose an amortization period of up to 35 years.

Closed Mortgage: A mortgage that, for a specified term, locks you into paying the mortgage for that period of time. It also locks in a mortgage rate, which doesn’t increase/decrease if rates do. Generally, if you break a closed mortgage, you will be required to pay three months’ interest payments as a penalty. The most common term for a closed mortgage is five years.

Closing Date: The date on which the buyer(s) and seller(s) meet, and the property and funds legally change hands.

Down Payment: The amount of cash that the buyer can initially invest in the property. The down payment is the difference between the purchase price and the value of the mortgage loan.

Fixed Rate Mortgage: A mortgage for which the interest rate has been fixed for a certain period of time (generally the length of a mortgage term).

Maturity Date: The date that your mortgage term ends. At this point, you can either pay off your mortgage or renew it.

Mortgage Brokerage: A mortgage brokerage is a legal identity licensed to trade in mortgages. Mortgage Brokers and Licensed Mortgage Associates must be licensed under a brokerage.

Open Mortgage: This is a mortgage with no term, which means that you can pay off your mortgage either fully or partially at any time with no penalty. Open mortgage rates are usually higher than closed mortgage rates.

Pre-Approved Mortgage: A pre-approved mortgage qualifies you for a loan amount before you start looking for houses. It also acts as a rate hold, guaranteeing you today’s interest rates until up to 120 days in the future.

Prepayment Penalties: If you “break” (or pay off) your mortgage before your term is up, you’ll have to pay a prepayment penalty. The penalty is generally three months’ interest payments.

Prepayment Privileges: Some mortgages allow you prepayment privileges. Examples of these are doubling up payments, paying off a certain percentage of your mortgage principal a year, or increasing your monthly mortgage payments by a certain percentage.

Purchase Contract: A legally binding document stating your (the buyer’s) intention to purchase a home from the seller provided that certain conditions be met (such as condition of financing, condition of a home inspection, etc.)

Refinancing: Paying off the existing mortgage and arranging a new one with a different lender, or re-negotiating a new term, interest rate, etc. of an existing mortgage.

Term: The length of time the interest rate is fixed. The end of the term is also the time when the borrower must either pay the outstanding mortgage balance, or re-negotiate a new mortgage with the lender. If the borrower pays of his or her mortgage before the term is up, prepayment penalties may apply.

Variable Rate Mortgage: A mortgage that has fixed payments, but whose principal portion of the payment fluctuates with interest rate changes. Variable rate mortgages generally fluctuate in respect to the prime lending rate. For example, Prime Rate minus 0.09%.

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