Common Mortgage Terms
February 28, 2018 | Posted by: Sherry Corbitt
When you apply for a mortgage or a mortgage pre-approval there are a number of terms that you will hear. The following is an explanation of some common mortgage terms:
A fixed interest rate will not change for the term of the mortgage. Typically a fixed interest rate will be a slightly higher rate but provides the peace of mind associated with knowing that interest costs will remain the same.
A variable interest rate will fluctuate with the rate of the market. Usually, this will not modify the overall amount of the mortgage payment, but it will change the portion of the monthly payment that goes towards interest costs or paying the mortgage (principal repayment).
If interest rates go down, the mortgage will be repaid faster. If interest rates go up, more of the payment will go towards the interest and less towards repaying the mortgage.
This option means that you may have to be prepared to accept some risk and uncertainty.
The term of a mortgage is the length of time for which options are chosen and agreed upon, such as the interest rate. It can be as little as six months or as long as five years or more. When the term is up, you have the ability to renegotiate your mortgage at the interest rate of that time and choose the same or different options.
A longer term (for example, five years) lets you plan ahead. It also protects you from interest rate increases.
A closed mortgage cannot be paid off, in whole or in part, before the end of its term. With a closed
An open mortgage allows you to pay off your mortgage in part or in full at any time without any penalties. You may also choose, at any time, to renegotiate the mortgage. This option provides more flexibility. It carries a higher interest rate. An open mortgage can be a good choice if you plan to sell your home in the near future or if you want to pay off a large sum of your mortgage loan.
Amortization is the length of time the entire mortgage debt will be repaid. Many mortgages are amortized over 25 years, but longer or shorter periods are available. Usually, the longer the amortization, the smaller the monthly payments. However, the longer the amortization, the higher the interest costs. If each mortgage term is five years, and the mortgage is amortized over 20 years, you will have to renegotiate the mortgage four times (every five years).
A mortgage loan is repaid in regular payments – monthly, bi-weekly or weekly. More frequent payment schedules (for example weekly) can save some interest costs by reducing the outstanding principal balance more quickly. The more payments that you make in a year, the lower the overall interest you have to pay on your mortgage.
A conventional mortgage is a mortgage loan that is equal to, or less than, 80% of the lending value of the property. The lending value is the property’s purchase price or market value, whichever is less. For a conventional mortgage, the down payment is at least 20% of the purchase price or market value.
High Ratio Mortgage
If your down payment is less than 20% of the home price, you will typically need a high-ratio mortgage. A high-ratio mortgage usually requires mortgage loan insurance. CMHC is a major provider of mortgage loan insurance. Your lender may add the mortgage loan insurance premium to your mortgage or ask you to pay it in full upon closing.