Mortgage Terms You Should Know

Whether you’re a first time home-buyer or re-entering the housing market after a while, all the jargon involved in negotiating home purchases can be really confusing. Having a basic understanding of some of the convoluted terms often used in mortgage and purchase negotiations will make it much easier to make informed decisions every step of the way.

Here’s a list of 10 frequently used terms to get you started!

• Mortgage

  In simple terms, mortgages are a loan secured from lenders such as banks, credit unions and other mortgage providers, that you can use to purchase or refinance a home.

  1. Open Mortgage: An open mortgage is a mortgage loan that can be prepaid at any time during its term, without extra charges or penalties. But what does that mean, exactly? In an open mortgage, you can choose to pay off your whole mortgage or refinance it at any time you like, or even renegotiate the terms of your contract if you’d like a better interest rate or a longer term. There are few to no restrictions!

  2. Closed Mortgage: A closed mortgage is the opposite. It cannot be fully paid-off, refinanced or renegotiated before the end of the term. Technically, you can still do it, but there will be a penalty, and it can be hefty.

• Equity

  Home equity, inherently, is a calculation. It is the market value of your home minus the amount of mortgage left to pay off. Think of it like this, since you bought the house on loan, it isn’t entirely yours–yet. Every time you make a payment, you own a little bit more of the house, and that ownership is called equity.

• Principal & Interest

  Your principal is the amount of money (the loan) you originally borrowed and have to pay back. The interest is what a lender is going to charge you for the use of that money; you pay this in addition to your principal amount. It is calculated as a percentage of your principal and can either be fixed or flexible.

  1. Variable interest rate: Your interest rate can increase or decrease throughout the term of your loan. It’s usually ideal to choose a variable rate mortgage if you think interest rates are likely to decrease in the future, because then you can take advantage of cheaper rates.

  2. Fixed interest rate: Your interest rate stays the same during the term of your loan. This is a good option if interest rates are low when you take out the loan and you expect that they will increase in the future. It’s also a good option if you like predictably when it comes to your monthly payments, as they will stay the same.

• Term & Maturity Date

  Contrary to popular belief, these are not the same thing. A term refers to the time period a mortgage agreement is valid for. During the lifetime of your mortgage, you will probably have multiple agreements, each lasting for a specific term (usually five years). At the end of a term, you are given the choice to pay off the remaining principal of your mortgage or renegotiate the agreement for another term.

  The maturity date can refer to two things: The date on which the term of your mortgage agreement ends, OR the due date of the final payment you have to make on your mortgage.

• Amortization Period

  Earlier I mentioned how during the lifetime of your mortgage, you can have multiple terms, or mortgage agreements. The amortization period is the technical term for the lifetime of the mortgage or the length of time it will take to pay off the mortgage in full (usually 25-30 years).

• Down Payment

  Just like the down payment you might make on a new iPhone to make your long-term phone plan cheaper, a down payment is one-time payment you make when you purchase a new home, and it is usually a percentage of the purchase price, the amount of which depends on how expensive the property is (can be between 5-20% of purchase price).

• Convertible Payment Plan

  This refers to different things depending on which source you look at. In general, a convertible mortgage allows you to ‘convert’ your mortgage from one type to another. Depending on your lender, you can start with a fixed-rate or closed mortgage and switch to a variable-rate or open mortgage later on (or vice versa). It can also mean getting a short-term mortgage with your first agreement, and switching it to a longer term later.

• Refinance

  Refinancing refers to the renegotiation of the terms of your loan agreement. Usually, this may be motivated by lower interest rates, or in the case that you may need an influx of cash for a big purchase. You can refinance your loan in order to either lower your monthly payments by taking advantage of lower rates, or refinance your loan to borrow money out of it (although this will increase your monthly payments).

• Loan To Value

  This term refers to the ratio of the loan to the actual value (purchase price) of the property. It’s used to determine how much down payment is best to put down.

• Total Debt Service Ratio

  This ratio determines what percentage of your gross income is already allocated to house-related payments, such as water, electricity and property taxes.