Explanation of key Mortgage terms

  1. Mortgage: A loan used to purchase real estate, where the property itself serves as collateral for the loan. If the borrower fails to repay the loan, the lender can take possession of the property through legal process called power of sale or foreclosure.
  2. Principal: The initial amount of money borrowed for the mortgage. It is the base amount upon which interest is calculated.
  3. Interest Rate: The percentage of the loan amount that the lender charges for borrowing money. It is a key factor in determining the total cost of the mortgage.
  4. Amortization: The process of repaying the mortgage through regular monthly payments that include both principal and interest. Over time, the proportion of the payment allocated to interest decreases, while the portion applied to the principal increases. Common amortization periods are 15, 20, or 30 years.
  5. Down Payment: The upfront payment made by the buyer toward the purchase price of the home. It is usually expressed as a percentage of the total home price. The minimum required downpayment in Canada is 5%, also if the downpayment is less than 20% the mortgage needs to be insured.
  6. Closing Costs: The various fees and expenses associated with finalizing a real estate transaction. Closing costs may include loan origination fees, appraisal fees, title insurance, land transfer tax and other charges.
  7. Fixed-Rate Mortgage (FRM): A mortgage with an interest rate that remains constant throughout the entire term of the loan. Monthly payments are predictable and do not change.
  8. Variable-Rate Mortgage (VRM): A mortgage with an interest rate that can change periodically based on the Bank of Canada Prime rate.
  9. Mortgage Insurance: Insurance that lenders often require borrowers to pay if their down payment is less than 20% of the home’s purchase price. Mortgage Insurance protects the lender in case the borrower defaults on the loan.
  10. Escrow: An account held by the lender to collect payments from the borrower for property taxes. The lender uses the funds to pay these expenses on behalf of the borrower.
  11. Prepayment Penalty: A fee charged by some lenders if the borrower pays off the mortgage before the specified term. Not all mortgages have prepayment penalties.

Understanding these terms can help individuals make informed decisions when navigating the process of obtaining a mortgage. If you have any further questions or would like clarifications, the mortgage brokers from Easy House Loan (www.easyhouseloan.ca), would be happy to assist you.