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Mortgages are the most common debt held by Canadians, and most citizens will hold a mortgage at some point in their lives, according to a survey retrieved by the Government of Canada. So, the average homeowner is typically exposed to mortgage vocabulary several times before and after getting a loan.
Understanding essential mortgage terms allow homeowners to be more involved in the process and make educated financial decisions. Here is a handy reference guide consisting of the most common mortgage industry terms that can allow you to communicate your mortgage needs.
An adjustable-rate mortgage is a loan with a varying interest rate that depends on the market rate movement. One common question that arises while determining an adjustable-rate mortgage is, what is the prime rate right now? The prime rate is what banks charge their most creditworthy customers, and it can affect the adjustable-rate as the prime rate can fluctuate overnight.
Amortization in a mortgage refers to the practice of spreading payments over multiple periods. The amortization is determined at the beginning of your loan, and it dictates the principal amount and interest rate you will pay monthly for your mortgage term.
Annual Percentage Rate (APR)
The APR is the interest rate you will pay on your loan annually, plus any additional lender fees. It usually includes mortgage insurance, discount points, loan origination fees and other costs.
An appraisal is an unbiased property valuation and opinion of a home done by a professional. It occurs when a mortgage is involved while buying, selling, or refinancing a property.
A balloon payment is a large payment that borrowers owe at the end of a balloon loan, such as a mortgage.
Closing costs are fees incurred while purchasing a home that you owe to your lender for finalizing your loan. The fees include standard closing costs, such as inspectors, attorneys, surveyors, and title insurance.
Debt-to-Income Ratio (DTI)
In the mortgage industry, DTI is the percentage of your monthly income to pay your debts. Lenders view consumers with higher DTI as riskier borrowers as they might face difficulties repaying their loans on time.
An escrow is a document containing assets or funds held by a third party until both parties in the mortgage transaction fulfill their contractual requirements.
A fixed-rate mortgage is a loan where the interest rate remains the same throughout the mortgage term. This means that the lender cannot change the interest rate locked in the initial agreement of the loan.
In a mortgage, pre-approval is a preliminary evaluation that allows a lender to confirm a buyer’s creditworthiness.
The principal is the amount of money you take out on a mortgage loan. The interest on the loan is added to the principal amount.
Private Mortgage Insurance (PMI)
PMI is a lender’s mortgage insurance that protects your lender if you default on your loan. If you make a down payment of less than 20 percent of the home’s purchase, you may have to pay a certain amount towards the PMI.
Navigating a mortgage can be overwhelming, but knowing this essential terminology can make the process more seamless and allow you to make informed decisions about your mortgage.