Buying a house can be a bit confusing at times, especially if it’s your first time buying one. It’s even more confusing when big words are thrown at you like “amortization”, and don’t even get me started on compounding interest rates. Hopefully this list of mortgage terms will help you feel more confident when sitting down to discuss lending options with your bank or mortgage broker<\/p>\n
Amortization:<\/strong> One of the more confusing words you’ll come across but it’s actually an easy one – it’s the amount of time you will take to pay off the loan. Typically this will be 20 or 25 years.<\/p>\n Term:<\/strong> The amortization (expalined above) is usually divided into several “terms”. At the end of a term you can either pay off the remaining balance of the mortgage without any prepayment penalties (expalined below) or you can renew the loan for another term. For example: John gets a mortgage with an amortization of 20 years and a term of 5 years. At the end of the 5 year term John has the option to pay off his mortgage or renew it for another 15 years with a new 5 year term.<\/p>\n Principal:<\/strong> This is the total outstanding balance of your loan.<\/p>\n Interest:<\/strong> Interest rates on mortgages in Canada are compounded semi-annually. This means the interest rate is applied twice per year.<\/p>\n Open vs Closed Mortgage:<\/strong> An open mortgage allows you to pay off your mortgage or change lenders at any time without incurring a prepayment penalty. A closed mortgage gives you a set payment schedule that you must follow. If you make any lump sum payments before the end of your term you will have to pay a penalty. Interest rates for closed mortgages are lower than for open mortgages and most closed mortgages give you options for making extra payments to avoid penalties.<\/p>\n Fixed Rate vs Variable Rate:<\/strong> A fixed rate means your interest rate stays the same throughout the term of the mortgage. A variable rate (also called a floating rate) means your interest rate as well as your monthly payment will change if the prime lending rate changes. By assuming the risk of fluctuating interest rates and payments you will typically be offered a lower rate than for a fixed rate mortgage.<\/p>\n Prime Rate:<\/strong> The Prime rate is linked to the Bank of Canada\u2019s overnight lending rate, which reflects the rate they charge when they loan funds to other banks; it is tied to global financial markets and monetary policy.<\/p>\n Portability:<\/strong> Because not everyone is happy paying a prepayment penalty, lenders came out with an option that keeps everyone happy – mortgage portability. This allows you to transfer your current mortgage to a new property that you are buying. All the terms of the mortgage typically stay the same. You can take advantage of this feature if your interest rate is lower than current rates. Instead of breaking the mortgage and getting a higher rate you can just “port” your mortgage to the new property.<\/p>\n Conventional vs High-Ratio Mortgages:<\/strong> High-ratio mortgages are when you loan more than 80% of the home’s value (ie. less than 20% down payment). Most mortgages are high-ratio mortgages. If you are putting the minimum 5% down on your home then it is considered a high-ratio mortgage because you are taking out a loan for more than 80% of the homes value. Anything less than 80% of the home’s value (or a down payment of 20% or more) is considered a conventional mortgage.<\/p>\n Pre-Approval:<\/strong> The first step in getting financing is getting a pre-approval. This is a way for you to find out how much you qualify for before you go house shopping. You can also usually lock in the rate for a specified period of time.<\/p>\n","protected":false},"excerpt":{"rendered":" Buying a house can be a bit confusing at times, especially if it’s your first time buying one. It’s even more confusing when big words are thrown at you like “amortization”, and don’t even get me started on compounding interest rates. Hopefully this list of mortgage terms will help you feel more confident when sitting … <\/p>\n