Planning to make investments in real estate? Or, perhaps you are shopping for mortgage deals to finance your purchase. Familiarize yourself with terms used in mortgage deals and real estate transactions. Here’s a short list of relevant terms.
Agreement of Purchase and Sale
Also known as contract of sale, this refers to an agreement, often in written form, entered into between the buyer and seller, wherein the buyer agrees to purchase real property from the seller according to the terms of the agreement.
The amortization period is the period it takes for the mortgage to be fully settled or paid in full. Different types of mortgage have different amortization periods, although the typical mortgage period in Canada is 25 years.
This refers to the valuation of a property, also known as property valuation or land valuation. It involves developing an opinion as to the value of any specific real estate property. By conducting an appraisal, a property’s market value is established.
This refers to a property value estimate, which is often a requirement for the sale, financing, taxation, as well as the partitioning of any property. It involves developing an opinion as to the value of the real estate property.
These are payments, which include both the amount that takes care of the interest fees as well as the principal amount. As the term advances, however, a bigger portion of each payment will cover the principal amount, assuming that interest charges are reduced lower than the blended payment.
Canada Mortgage and Housing Corporation (CMHC)
CMHC is the national housing agency of Canada. It was put up in 1946 as a government-owned corporation and is now a national institution that offers mortgage loan insurance, housing policy and programs, mortgage-backed securities, and research on housing matters.
Certificate of Location or Survey
This refers to a document that indicates the precise location of a real estate property. It also specifies the type of the property, as well as its size, including any additions done on the property, if any.
Certificate of Search or Abstract of Title
This document is a summary of the many activities, which involve the ownership of a piece of land. Prior to the purchase of a real estate, a buyer makes arrangements for the examination of the history of the real estate title.
This type of mortgage cannot be subjected to refinancing, renegotiation, or prepayment, prior to its maturity. It is also known as closed-end mortgage. It involves a loan agreement, which does not allow the borrower to repay the loan before its date of maturity.
These are miscellaneous fees the home buyer needs to settle along with the down payment for the mortgage. Closing costs are used to pay the processing fees, paperwork expenses, surveying fees, and fees charged by the government, such as payment for the recording of the property deed.
Refers to the date when the property deed is delivered by the seller to the buyer, and the buyer pays for the deed or the property. The closing date is determined during the negotiation phase.
CMHC or GEMICO Insurance Premium
The borrower pays for the premium of the mortgage insurance, which is provided to the lender by CMHC, which stands for Canada Mortgage and Housing Corporation, or GEMICO, which stands for G.E. Mortgage Insurance Company. Mortgage insurance provides cushion to the lender for possible losses in case the borrower defaults on the loan.
This refers to a purchase offer made by an interested buyer. However, the offer can be operative only after the fulfillment of specific conditions, such as the commitment of the lending company to approve a loan to pay off the purchase.
Conventional mortgage is also known as fixed-rate mortgage. It is a type of mortgage wherein the interest rate remains fixed throughout the entire loan term. It can also mean a type of mortgage that is not insured by the government.
Debt Service Ratio
Also known as debt service coverage ratio, this ratio is used to assess the amount of debt, which can be sustained by the cash flow made by the property. The ratio is obtained by dividing the net income of the property by the new mortgage payment.
Deed (Certificate of Ownership)
This refers to the document that transfers home ownership from the seller to the buyer, and is normally signed by the seller. Afterward, the document is registered to give proof to the buyer’s ownership of the property.
This refers to an amount given in advance to show commitment at completing the purchase of a real estate property. In real estate, deposit is also known as good faith deposit, contract deposit, or plainly a deposit. The amount will vary according to the terms of the seller or the contract.
Equity refers to current market value of a property less any outstanding mortgage balance. Equity is the degree of ownership the holder of the mortgage has on the property, after payments have been made. Prior to the full repayment of the loan, the buyer builds up equity on the commercial or real estate property, and once fully repaid, the buyer will become the property owner.
This refers to insurance obtained in order to take care of property losses due to fire. This involves a contract where one party commits to indemnify another against fire losses, for a premium. The premium needs to be paid in order to insure the property.
This is an offer made to an individual or another party, which involves the agreement to perform any action or not perform any once the offer has already been accepted. This cannot be revoked within the term indicated in the offer.
This refers to a type of mortgage wherein the interest rate is not subject to variation or changes during the entire loan term. Fixed-rate mortgage is also known as conventional mortgage.
This refers to the act of foreclosing a property, wherein the mortgager’s right at redeeming the property at a later date is completely extinguished. This involves a situation wherein the homeowner is not able to make principal and interest payments on the mortgage, prompting the lender to sell the property according to contract terms.
Gross Debt Service (GDS) Ratio
This refers to the debt service measure used as a rule of thumb by financial lenders in order to arrive at an assessment as to whether a loan or mortgage applicant is in too much debt. A ratio of less than 30 percent indicates that the borrower has a reasonable level of debt.
Gross Household Income
This refers to the combined gross income of all the members of the household, specifically those who are not younger than 15 years old. Gross household income also relates to the collective income of all the members of the household applying for credit.
This refers to the type of mortgage wherein its amount is no more than 80% of the mortgaged property’s appraised value or purchase price, whichever is lower. In Canada, these high ratio mortgages are conditional on CMHC or GEMICO insurance premiums.
This refers to the act of maintaining ownership of a security over an extended period of time. This recommendation settles between giving encouragement to investors to buy and suggesting to them that they sell. It is also known as the investment strategy buy-and-hold.
This refers to the difference between the fair market value of the home and the outstanding balance of the mortgage. Home equity is also known as real property value. As the debtor makes payments against the balance on the mortgage, home equity consequently increases.
Inspection or home inspection involves the assessment or examination of a property by a professional once an offer has been made, so as to ascertain that property construction meets specific building codes, which include considerations on its foundation, wiring, roofing, plumbing, and use of construction materials.
Interest Rate Differential Amount (IRD)
IRD is a penalty imposed by the lender when the mortgagor chooses to prepay the entire mortgage or part of it outside of the stipulated repayment term. When calculating the IRD, the difference between the existing rate and the rate for the remaining term is obtained first and is multiplied by the outstanding principal and the balance of the term.
This refers to a loan wherein the property owner is unable or not willing to commit to permanent financing. This loan is commonly set for not more than three years, until such time that market or financial conditions start to improve.
This refers to the date wherein the principal amount of a note, draft, or other debt instrument becomes due. The maturity date is the date wherein the interest payments end. For installment loans such as mortgages, this refers to the date when the installment loan must be paid in full.
Mortgage Critical Illness Insurance
The mortgage critical illness insurance protects your mortgage loan from risks of default payment should you develop a critical illness. In the event that you will suffer from critical illness, one that is specified in your policy such as cancer or a stroke, the policy will pay out a lump sum amount to you, tax-free.
Mortgagee and Mortgagor
Mortgagee refers to the individual or business for whom or which the mortgage is made. The mortgagee is entitled to receive payment, which has been secured to him by the mortgage. The mortgagor, on the other hand, is the one who makes the mortgage and is liable to specific duties, such as making mortgage payments.
Mortgage life insurance
This refers to the insurance policy which will take care of the mortgage balance, should the mortgagor die prior to the full repayment of the loan. This insurance provides protection to the heirs of the mortgage holder in the event of his or her death.
This refers to the period wherein you will be paying a specific interest rate on your mortgage. Normally, these terms last anywhere from six months to ten years. This is alternatively known as loan term.
This type of mortgage can be paid off or settled before its maturity date without penalty on the part of the borrower. Generally, open mortgages are not preferred by lenders since earned interest is typically reduced due to the early pay off. Compared to closed mortgages, open mortgages often have higher interest rates.
This refers to the regularity of payments made by the borrower, whether on a weekly, bi-weekly, twice monthly, or monthly basis. Typically, mortgages have different payment options, and borrowers need to choose the option that best suits their repayment capacity. Paying more frequently will keep you from incurring more interest over the life of your loan.
This refers to the acronym that stands for Principal, Interest, and Taxes. This covers the payment which the borrower will be making on his or her mortgage, including the principal amount, interest fees, and the tax payments involved. Simply put, the P.I.T refers to the components of a mortgage payment.
This refers to a mortgage feature that allows a borrower to transfer borrowing to another property from one property. In this arrangement, a special rate is used and some charges are waived. It is also possible to port just a portion of a mortgage to a new property.
Also known as prepayment penalty, this refers to the fee charged to a borrower who makes a prepayment on his or her mortgage. This is normally included in the mortgage contract, stating that if the mortgage is prepaid within a specific period, the borrower will have to pay a penalty.
Also known as prepayment clause, a prepayment option is a loan provision which allows the borrower to settle the loan in full prior to the maturity date without any penalty. All consumer mortgages normally have prepayment clauses, however, most commercial loans do not have prepayment options.
This refers to the amount borrowed on a mortgage which remains unpaid. This may also refer to a portion of the borrowed amount which has not yet been paid exclusive of interest. As the principal is paid, the outstanding balance on a mortgage is reduced. Principal is used interchangeably with principal amount.
This refers to the act of obtaining a new loan and using the proceeds to pay off an existing loan. The loans however need to be of the same size and the same property should be used as collateral. In order to determine whether refinancing is a viable option, refinancing fees need to be compared first with the savings in interest.
Renewing a mortgage involves “rolling over” on new terms and conditions which are workable for both lender and borrower. If renewal is not obtained, the borrower is obligated to repay the lender in full. Renewal is also known as renewing a mortgage.
This refers to an investment instrument which has been issued by a private corporation or by the government and provides evidence of debt. Security also refers to any property which has been pledged as collateral for a loan.
This refers to the period during which the mortgage needs to be paid. Mortgage amortization may be for the long-term or short-term. Long-term mortgages can reach up to 35 years, while short-term mortgages may be amortized for as little as 6 months. It is also known as mortgage term or loan term.
Total Debt Service (TDS) Ratio
This refers to the rule of thumb used by financial lenders in order to assess as to whether a borrower applying for mortgage is in too much debt or not. In order to arrive at this percentage, your monthly shelter costs and other monthly obligations is divided by your gross monthly income and multiplied by 100.
Variable Rate Mortgage
Also known as adjustable rate mortgage, variable rate mortgage refers to a type of mortgage wherein the interest changes over the term of the loan. These changes are often related to prime rate changes or Treasury bill rate fluctuations. Normally, variable rate mortgages have better initial rates than fixed rate mortgages.