Do You Know These Common Mortgage Terms?
January 17, 2025 | Posted by: Sherry Corbitt
When you apply for a mortgage or a mortgage pre-approval, there are several terms that you will hear. The following is an explanation of some standard mortgage terms:
Fixed-Rate
A fixed interest rate will not change for the term of the mortgage. Typically a fixed interest rate will be slightly higher but provides the peace of mind to know that interest costs will remain the same.
Variable Rate
A variable interest rate will fluctuate with the rate of the market. Usually, this will not modify the overall amount of the mortgage payment. Still, it will change the monthly payment portion that goes towards interest costs or paying the mortgage (principal repayment).
If interest rates go down, the mortgage will be repaid faster. But, conversely, 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.
Mortgage Term
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 can 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. It also protects you from interest rate increases.
Closed Mortgage
A closed mortgage cannot be paid off, in whole or in part, before the end of its term. With a closed mortgage, you may only make your monthly payments – you cannot pay more than the agreed payment. It usually carries a lower interest rate. A closed mortgage is a good choice if you'd like to have a fixed monthly fee. Most lenders allow homeowners to make additional payments of a determined maximum amount without penalty. Typically, most people will select a closed mortgage.
Open Mortgage
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. However, it carries a higher interest rate. Nevertheless, an open mortgage can be a good choice if you plan to sell your home shortly or if you want to pay off a large sum of your mortgage loan.
Amortization
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. For example, 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).
Payment Schedule
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 quickly reducing the outstanding principal balance. In addition, the more payments you make in a year, the lower the overall interest you have to pay on your mortgage.
Conventional Mortgage
A conventional mortgage is a mortgage loan that is equal to, or less than, 80% of the property's lending value. The lending value is the property's purchase price or market value, whichever is less. The down payment is at least 20% of the purchase price or market value for a conventional mortgage.
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 primary 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.
Learning these terms can undoubtedly make your mortgage process easier to understand!
If you have any questions regarding any mortgage terms, please reach out to me!
Sherry Corbitt, Mortgage Broker
