Before you let words like “amortization” or “debt consolidation” intimidate you, check out our handy dandy glossary. Here you will find a list of common mortgage terms that will help you understand your options, impress your mortgage broker, and walk away with the best deal possible!
When the owner gives up their legal claim to a house by demonstrating that they have no intention of returning to or reclaiming it. This may happen if the condition of ownership for a property becomes a burden. In the event of “abandonment,” creditors can seek to recover their money as the property is no longer part of the estate.
ACCELERATED BI-WEEKLY MORTGAGE PAYMENTS
When you split your monthly mortgage payment in half and send a payment every two weeks so that the payment date will always fall on a different calendar date. If you choose accelerated bi-weekly payments, you will make 26 payments a year while if you do just bi-weekly payments, you will make 24 payments a year. Doing an accelerated payment means you will be making 1 extra payment a year which could save you a significant amount of money.
ADJUSTABLE RATE MORTGAGE (ARM)
A mortgage where the interest rate is periodically adjusted based on an index. In the U.S. the rate the lender charges you is determined by the general interest rate market, and your own financial credibility. In Canada, the index is the prime lending rate.
Also known as interest adjustment date. Is the date when financial changes are planned to happen. An example is the date on which the interest will begin to accrue on your mortgage.
A graph or table showing the amount paid, the amount applied to interest, the amount applied to principal, and the remaining balance on your mortgage for every month of your term. Helps you have an idea of how much you are paying each month, and what it’s going towards (interest or principal).
The fair market value of a property as determined by a licensed and qualified appraiser.
ARTICLES OF INCORPORATION
Only necessary for a commercial loan. A document filed with the government describing the purpose, name, place of business, and other details of your corporation. Must be filled out by the corporation’s founders. Upon completion, you will receive a certificate of incorporation.
Something you own that has value or use. They comprise your net worth. Example: vehicle, savings, home, etc.
When a homeowner sells their home, they sometimes are able to transfer their mortgage to the new owner without changing the terms of the original mortgage. However, if the price the seller is asking for is more than the assumable mortgage amount, then the buyer will have to come up with the rest of the funds through other means.
BI-WEEKLY MORTGAGE PAYMENTS
When you split your monthly mortgage payment in half and send a payment twice a month. If you do bi-weekly payments, you will make 24 payments a year. Doing bi-weekly payments means you will be making the same number of payments a year as for (normal) monthly payments. See accelerated bi-weekly payments as well.
Also known as interim financing. A temporary loan which is needed when you close on the loan for your new house before you’ve sold your old house. Is secured by your existing home.
CASH OUT MORTGAGE
A mortgage loan that allows you to “take out” equity for other purposes.
A restrictive type of mortgage that cannot be paid off, renegotiated, or refinanced for a certain period of time. It also locks in a mortgage rate, which doesn’t increase or decrease. 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. A simple way of looking at closed mortgages is that they’re any mortgage which has a term attached to it
Costs that are associated with completing the mortgage transaction. Examples of closing costs are lawyer fees, title insurance, appraisal fees, home insurance, and home inspection fees.
The day that ownership of a home transfers from the seller to the buyer. This must be stated and agreed to by all parties on the sale contract.
If the borrower does not have enough funds to repay their loan, the lender can then take ownership of the collateral. In respect to mortgage loans, the collateral is the property being mortgaged.
A monthly fee that covers a resident’s shared expenses for maintenance, repair, security, and upkeep of common areas. The cost may depend on the size of the condominium unit, with larger units paying more in condo fees.
A loan that is NOT backed or insured by a government entity. Usually available with private lenders and Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac).
A credit reporting agency that gathers credit information and compiles it into a credit report. The three credit bureaus in the U.S. are Equifax, Trans Union, and Experian. The two credit bureaus in Canada are Equifax Canada and Trans Union of Canada.
History of an individual’s credit, including the names of companies that have extended you credit and/or loans, and the amount available to you in credit and loan amounts. Additionally, if you have delinquent accounts, bankruptcies, foreclosures or lawsuits, these will also be included in your credit report.
The grade given to your credit situation and credit history. Usually a number between 300 and 850, with 850 being the highest and 300 being the lowest.
A means of combining several debts into one debt that has one monthly payment. By rolling high-interest debt into a single, low-interest payment, you can reduce the amount you will have to pay in interest and pay off your debt faster
DEED OF TRUST
See Mortgage Deed.
Failure to pay debt as agreed. In respect to mortgages, failure to make mortgage payments which may result in foreclosure.
This represents the amount of cash that the buyer can put towards purchasing the property. The remainder must be covered by the mortgage loan.
The current value of the property minus any amounts owed on it. This will fluctuate as the property’s market value changes and as the borrower makes more mortgage payments (and therefore owes less money on the property).
FAIR MARKET VALUE (FMV)
The price a ready, willing, and able buyer, with knowledge of all pertinent facts, is willing to pay for a certain property.
The first or original mortgage taken out on a property. In the event of default, the first mortgage takes precedent (must be dealt with first) before any other liens/mortgages.
FIXED RATE MORTGAGE
A mortgage for which the interest rate is fixed for the life of the loan.
The legal process in which the mortgage lender sells the property because the borrower has defaulted on their mortgage loan.
Stands for Gross Debt Service. This is the percentage of the borrower’s annual gross income that is required to cover monthly housing costs. This includes mortgage principal payments, mortgage interest payments, property taxes, and heat payments. If the property is a condominium, condo fees will also be included.
If a home buyer receives money from someone to help cover their down payment, they must provide proof of this. A gift letter states that the gift giver (usually a family member) is making a gift of a certain amount for the down payment of a home. It also states that the gift is genuine and that the gift receiver is not required to pay back the gift.
Stands for Home Equity Line of Credit. A loan that is like a line of credit (think credit card), as opposed to being a fixed dollar amount. In a HELOC, your credit limit is based on how much equity you have.
A mortgage in which the borrower puts in less than 20% for their down payment, and therefore must borrow more than 80% of the home’s appraised value or purchase price (whichever is less). High-ratio mortgages must be insured to protect the lender against default.
HOME EQUITY LOAN
Covers your physical home in the event of loss due to fire, theft, damage through certain natural elements, etc. Coverage will depend on what kind of policy you have and how comprehensive it is. May also cover the contents of your home and any other losses you may suffer due to destruction of property in whole or in part.
The percentage of the loan charged by the lender for use of their money.
See bridge loan
See offer letter.
The party that advances the funds for a mortgage loan
LETTER OF EMPLOYMENT
See offer letter.
A financial obligation of an individual. For example, credit card debt, car payments, mortgage payments, etc.
Refers to a legal claim against a property to guarantee the payment of a debt or other obligation.
A borrowed amount of money that is generally repaid in full along with a certain amount of interest.
LOAN TO VALUE RATIO (LTV)
The ratio of the value of the loan to the appraised value or purchase price of the property (whichever is less). For example, if someone purchased a home for $100,000 and had $20,000 as a down payment, the mortgage would be $80,000, or 80% of the value of the home. Therefore, it has an 80% LTV.
An employee of a lending institution that functions as a liaison between the lender and the customers applying for a loan.
The highest price a buyer would pay and the lowest price a seller would accept on a property. Market value could differ from the price that the property could be sold for at a given time since buyers and sellers will fluctuate in what they’re willing to pay/accept.
What a willing, ready, and able buyer will pay for a property and what the seller will accept for it.
The date that your mortgage term ends. In the U.S., this would be when you paid off the total amount owed from both principal and interest (as long as you kept up with your payments). In Canada, this would be when you either pay off your mortgage or renew it.
A loan backed by real estate in which the borrower must make a set number of payments or risk losing their property.
The process of repaying a mortgage loan. Usually by paying off interest first, and then the principal amount.
First step in obtaining financing for a real estate purchase. If successful, will result in a pre-approval.
Someone who helps connect borrowers with mortgage lenders. They do not personally lend any of their own money like a mortgage banker does. Instead, brokers facilitate the process of applying for a mortgage by gathering documentation and presenting mortgage offers to the borrower.
A business with the principal activity of providing or servicing mortgage loans for residential or commercial property. Also may be a chartered bank, a credit union, a trust company or other financial institution providing mortgage loans.
A legal document designating the property as collateral for the mortgage loan.
The individual or entity who owns the mortgage loan and who is entitled to enforce the terms of the mortgage. In some cases, this is the lender (so a bank, credit union, trust company, etc.) while in other cases, it may be the party that bought your mortgage in the secondary market.
Required for high-ratio mortgages. It protects the lender in the event that a borrower defaults on a mortgage. If buyers cannot afford to put at least 20% down, they may be required by the lender to pay for mortgage insurance.
A generic term referring to a potential mortgage borrower
An entity that provides financing for the purchase of real estate.
MORTGAGE LIFE INSURANCE
This is insurance that pays off the mortgage in the event of death or disability.
A loan that is secured by real estate (which is owned by the borrower).
A periodic amount (usually monthly) that is paid to a mortgage holder for repayment of a mortgage loan.
The process of applying for a mortgage, having an underwriter review your mortgage application, and submitting mortgage documents to a mortgage lender for review. The qualification is the standard by which the lender will lend money on a mortgage loan.
The interest that a mortgage borrower will pay for borrowing money.
The process of replacing your mortgage(s) on your property with a new mortgage.
Usually from from the mortgage lender. It includes such information as property address, outstanding principal balance, monthly payment, interest rate, mortgage term, etc.
In Canada, “mortgage term” means the length of time in which a mortgage has legal effect (before you must renew it again). In the U.S., however, “mortgage term” represents the full duration of your mortgage. Therefore, Canada usually has terms as short as 5 years while in the U.S. the average term is 30 years.
The party that uses their home as a security for the mortgage; the borrower.
A letter from your employer stating your length of employment, guaranteed number of hours worked per week, and annual gross income.
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. Some examples of open mortgages are HELOCs and balloon mortgages.
The interest rate at which large banks borrow money, short-term, among themselves in the overnight market.
Usually a document you receive from your employer on your pay day stating, for that pay period, your gross earnings, the amount of income income taxes deducted, net income, etc. Your pay stub should also state the year-to-date amounts of all the aforementioned income and payments.
A mortgage that permits the borrower to transfer their mortgage balance to a new property while staying with the same lender and avoiding any penalty fees. Useful for borrowers who move around a lot as it saves them from paying multiple closing costs.
A feature of a mortgage that allows the borrower to move their mortgage to a new property if they move before their mortgage term is up (with no penalty).
Qualifies borrowers for a loan amount before they start looking at houses. It also acts as a rate hold, guaranteeing today’s interest rates until up to 120 days in the future.
If borrowers break or pay off their mortgage early, they’ll have to pay a prepayment penalty.
In the U.S., prepayment penalties are rare, but can still be found on portfolio loans. Most prepays last only 1-3 years, so if the borrower refinances, sells their house, or pays off their mortgage before then, they will be penalized.
In Canada, prepayment penalties apply until the end of the mortgage term. The penalty is generally three months’ interest payments.
The amount of money borrowed or still owing on a mortgage. Does not include the amount accrued through interest.
Also known as prime lending. It refers to the lowest commercial interest rate charged by banks at a particular time and is usually reserved for those with the highest credit ratings.
PROPERTY TAX ASSESSMENT
A method of placing value on real estate. Used to determine property tax.
A legally binding document stating the buyer’s intention to purchase a home from the seller. It usually has certain conditions (such as a condition of financing, condition of a home inspection, etc.)
Refers to an agreement between a mortgage lender and a borrower to fix a certain interest rate for a number of days while they wait to close on a real estate purchase and mortgage loan.
REAL ESTATE AGENT
The person acting as the agent for the sale of real estate on behalf of the property owner.
REAL ESTATE APPRAISAL
Indicates a report prepared by a real estate appraiser that estimates the value of a home and that states the features of the home. Lenders generally require appraisals to verify that the buyer has purchased the home for a fair market price, to determine what the market rents are for the home, to ensure that the home meets the lender’s standards, etc.
A real estate agent who is a member of a local real estate board, the National Association of Realtors (in the U.S.) or the Canadian Real Estate Association (in Canada), and a provincial association.
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.
A type of mortgage loan available in Canada for homeowners 60 years and older and in the U.S. for homeowners 62 years and older which allows them to turn equity in their house to cash.
A written agreement between a buyer and seller of real estate, setting forth the terms of the sale, and specifying the rights and duties of the parties in the real estate transaction.
The second mortgage taken out on a property. In the event of default, the second mortgage will have second place claim, meaning it will be dealt with after the first mortgage has been taken care of.
The property that will be pledged as collateral for a loan.
SEMI-MONTHLY MORTGAGE PAYMENTS
Structured for the borrower to make mortgage payments 2 times a month. For instance, on the 1st and 15th of each month.
Equity that comes from a purchaser or homeowner performing upkeep or doing renovations on a property that is up for purchase or refinancing.
Stands for Total Debt Service Ratio. This is the percentage of annual gross income that is required to pay back all the borrower’s debt, including mortgage principal payments, mortgage interest payments, property taxes, and heat payments, plus monthly payments of any other debt. If the property is a condominium, condo fees will also be worked into this ratio.
See mortgage term.
A lien on a property that has third place claim after the first and second mortgages.
Legal ownership in a property.
Insurance that protects the owner or mortgagee of the property from any lawsuits or claims arising from a defective title.
The process of deciding whether or not to provide a mortgage loan to a home buyer based on credit, employment, assets and other factors.
VARIABLE RATE MORTGAGE
See Adjustable Rate Mortgage.
A personal, pre-printed check with “void” written across it. It is given to the lender for the account the mortgage payments will be coming from as proof that the account is, indeed, the borrower’s.