Borrower's Glossary of Terms

Amortization

Number of fixed payments or years it takes to repay the entire amount of the mortgage loan.

Assumption Agreement

A legal document signed by a home buyer which requires the buyer to assume responsibility for the obligations of a mortgage made by a former owner.

Blended Payments

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

Closed Mortgage

A mortgage which cannot be prepaid, renegotiated or refinanced.

Conventional Mortgage (Fixed-rate mortgage)

A mortgage loan which does not exceed 75% of the appraised value or purchase price of the property, whichever is the lesser of the two. Mortgages that exceed this limit must be insured.

Debt-service Ratio

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

Default

Non-payment of the instalments due under the terms of the mortgage(s).

Discharge

The removal of all mortgages and financial encumbrances on a property.

Foreclosure

A legal procedure whereby the lender obtains ownership of the property following default by the borrower.

Gross Debt Service Ratio

The percentage of gross annual income required to cover payments associated with housing (mortgage principal and interest, taxes and secondary financing). Most lenders prefer that the GDS be no more than 32%.

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 by the borrower.

Mortgage Life Insurance

A form of reducing term insurance recommended for the borrower. 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.

Mortgagee

The lender.

Mortgagor

The borrower.

Open Mortgage

A mortgage which can be prepaid at any time, without penalty.

P.I. (Principal & Interest)

Principal and interest due on a mortgage.

P.l.T. (Principal, Interest, & Taxes)

Principal, interest and taxes due on a mortgage.

Penalty

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

Prepayment Option

The right to prepay specified amounts of the principal balance. Penalty interest may be incurred on prepayment options.

Principal

The amount you still owe the lender at any time.

Rate (interest)

The return the lender receives for loaning you the money for the mortgage.

Roll-over Mortgage

A mortgage loan where the interest rate is established for a specific term. At the end of this term the mortgage is said to "roll over" and the borrower and lender may agree to extend to 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.

Second Mortgage

This is usually at a higher interest rate and represents the difference between the price of the house and first mortgage plus the downpayment. This may be obtained from banks and finance companies or through lawyers or notaries.

Term

In a mortgage, "term" is the actual length of time for which the money is loaned, at that particular rate of interest. After the term expires, you can either repay the balance of the principal then owing or renegotiate the mortgage at current rates and conditions.

Underwriting Fees

A sum of money collected by some lenders to offset expenses incurred in the lending transaction.

Variable Rate Mortgage (Floating Rate)

A mortgage where payments can be fixed from one to five years, but the interest rate could change from month to month depending on market conditions. If interest rates go down, the monthly principal is reduced; if rates go up, the monthly payments might not cover the interest owing and payments may be increased for the next term. Most variable rate mortgages allow prepayment of any amount (with certain minimums) on any monthly payment date and usually without penalty.

Vendor Financing (Balance of Sale)

The seller sometimes takes the mortgage at a rate lower than market rates. Most of these arrangements are not renewable nor transferable to the next owner.



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