How to speak mortgage 101: knowing your terms and definitions

Most of us, the terminology of the financial world can be confusing, if not downright intimidating. That rule holds true with mortgage plans as well, with a large number of highly specific terms that all sound similar to the untrained ear. However, it is critically important to know exactly what kind of a mortgage agreement you are signing, as seemingly similar provisions can be dramatically different in actual practice. To get the most from your conversations with the Guelph Mortgage Brokers, you need to speak this language fluently, and this brief dictionary of commonly used mortgage terms is a good place to start learning:

Mortgage: a type of loan that can be used only for purchase of real estate, with the property itself serving as a guarantee

APR (Annual percentage rate): the rate at which the interest on the loan is calculated and the resulting value added to the total amount owed every year during the mortgage lifetime

Amortization period: total length of the mortgage agreement, after which the property is fully paid off and officially belongs to its new owner

Fixed-rate mortgage: loan agreement with the level of APR firmly set in advance, ensuring that total amount owed won’t change over the years

Variable-rate mortgage: loan agreement where APR fluctuates according to the current market conditions and general state of the economy, with monthly payments increasing or decreasing

Prime rate: APR amount set (and changed periodically) by central institutions, serving as the guideline for individual lenders when they are deciding on their own interest rates

Lender: licensed institution, typically a bank, that provides the funds necessary for purchasing a new home in the form of a long-term loan

Down payment: cash amount that must be paid at signing time, usually representing at least 5-10% of the total value of the purchased home

Principal: the dollar amount of the loan before any interest is added, in case of mortgages this amount normally corresponds to market value of the targeted home

Credit report: a document containing details about the applicant’s credit history that lenders will study before deciding whether to approve the loan

Debt to income ratio: a parameter that features in the credit report, representing the level of your existing obligations versus your family revenues

Maturity date: the day when the mortgage expires and must be either completely settled or renewed through a separate agreement

Refinancing: revision of the original mortgage agreement that can be used to lower monthly dues or pursue another, more expensive property