Glossary of Mortgage Terms
Understand your mortgage advisor with this handy guide
Before walking in to talk to your mortgage advisor, there are key terms that are necessary to know. Being able to talk the finance talk can help present a more knowledgeable image of yourself to your broker. This will make it more likely for you to get a better deal as you seem like you have experience with brokers before and know what you are talking about. Whether it is your first time meeting with an advisor or you are looking to expand your vocabulary, the list below is for you.
The transfer of interest in a property/home to a lender as a security (tradable financial asset) for debt.
A monthly mortgage plan where a fixed amount is paid to the lender each month. This amount includes the interest due and a repayment to pay down the principal of the mortgage. When the term of a repayment mortgage is finished, the loan has been completely repaid.
No capital is repaid, but rather just the interest payments.This means that at the end of the mortgage term, the full amount of the loan is still outstanding.
The charge by the lender for borrowing money. Interest rates exists because lenders can’t give away money for free. They need to get returns on their investments.
The interest rate charged by the lender varies, usually depending on the overall economy and mortgage market.
The interest rate remains the same for a set period of time.
The interest rate is less than the standard variable rate that the lender offers.
The interest rate has a maximum rate that the mortgage can never exceed.
The interest rate has a minimum rate that the mortgage can never fall below.
Principal, Interest, Taxes, Insurance (PITI)
PITI is an acronym that represents the four elements of a monthly mortgage payment. Payments for principal and interest go directly towards repaying the loan. Payments for taxes and insurance go into a escrow account to cover the fees when they are due.
Make loans to borrowers directly. Lenders receive payments from 1) start fees (ex. down payments), 2) monthly interest payments, and 3) payments if they sell your loan to someone else.
Some mortgage brokers make the loans directly to you, where as others find mortgage lenders for you. Be careful, mortgage brokers are not required to find the best deal for you unless they have contracted with you as their agent.
Essentially a large cost paid at closing that legally transfers a home to its new owners. Closing costs are usually around 2-6% of the mortgage amount.
The portion of a home’s purchase price that is paid in cash. This payment is separate from the mortgage plan.
A fee charged by the loan originator to the borrower for making a mortgage loan.
A fee paid for a chartered surveyor to look at the property and ensure it is worth enough to cover the mortgage amount.
Loan-To-Value (LTV) Ratio
Expressed as a percentage, the LTV ratio is the amount to be borrowed divided by the price of the home to be purchased. This ratio is used to qualify borrowers for a mortgage. The lower the LTV, the looser the qualification guidelines for certain mortgage programs become. As a general guideline, a low LTV ratio would be below 80%, and would carry lower interest rates since the borrowers are at lower risks.
Debt-To-Income (DTI) Ratio
A ratio that lenders analyze to measure a borrower’s ability to manage the mortgage payments. If this ratio is less than one, then that means the borrower has sufficient income to pay down his or her debt.
Escrow (Impound) Account
This is simply a separate account maintained by the mortgage company to collect insurance and tax payments that are due for your home, but are not technically part of repaying the mortgage.
Refinancing of a mortgage. This is usually done when moving from one mortgage broker to another.
Paying back a mortgage early. Usually done when remortgaging to another mortgage broker or via a lump sum payment when selling off the property.