The world of mortgage lending is so vast, it’s easy for a first-time homebuyer to get lost in the jargon. Before walking into a bank, a buyer should become familiar with a few common mortgage terms to understand the process and the conditions of the mortgage being offered. Here are the top 8 mortgage terms Canadian buyers needs to know.
1. Loan-to-Value ratio (LTV)
The mortgage term LTV measures what percentage of the property value (which can be different than the sale price) the loan encompasses. If the LTV is greater than 80%, the loan is considered “high ratio,” and the lender may require the borrower to buy mortgage insurance.
2. Down payment
The amount of the purchase price paid to the seller that is not covered by the loan is termed the down payment. With a greater down payment, the buyer is more vested in the property and considered to be lower risk, which can affect the type of loan offered, the interest rate, and (if the down payment lowers the LTV below 80%) whether mortgage insurance is required.
3. Closing costs
Closing costs consist of all the fees and expenses associated with the sale of the property, such as broker fees, taxes, and title costs.
The sale contract will specify which are the buyer’s responsibility and which, if any, are the seller’s. The buyer pays the closing costs in addition to the down payment.
4. Mortgage insurance
Mortgage insurance protects the lender from losses related to the loan, such as a loss resulting from foreclosure. This differs from homeowner’s insurance, which protects the buyer from property damage and other liabilities.
5. Fixed-rate mortgage
The interest rate on this type of loan will not fluctuate for the entire loan term.
6. Variable-rate mortgage
This type of interest rate will vary with market conditions. Although the payment remains the same, changes in the interest rate will affect how much of the monthly payment repays principal and how much interest.
These changes can also affect the amortization period, or length of time it will take to repay the loan, as well as the total interest paid over the life of the loan.
Because the initial rate on these loans is usually lower, many first-time buyers will consider only the initial rate, but it is important to also consider the type of loan before making a decision.
The term of the loan, which differs from the amortization period, is the contractual time period under which the conditions of the mortgage, such as interest rate, are in force.
If the term ends and the amortization has not been completed, the principal will need to be repaid in full or a new loan contract drawn up.
8. Gross Debt Service ratio (GDS) and Total Debt Service ratio (TDS)
GDS measures how much of the buyer’s income will go to the PITH (principal, interest, taxes and heating costs) payment.
TDS measures how much of the buyer’s income will go to the housing payment and all other debt. The lender considers lower ratios to be lower risk and determines loan eligibility from these ratios.
These ratios will also determine how favorable the conditions of the loan, such as interest rate, are for the buyer.
Although there are many more mortgage terms, a comprehension of these basic concepts will help Canadian first-time buyers understand the loan being offered and whether it fits their needs.
For more advice on home buying and to see homes for sale, visit ComFree.com.
Martin Dallas is a freelance writer who concentrates his efforts on real estate, the mortgage industry, banking & finance, the Canadian real estate market, the New York real estate market, and other areas. Those considering a new apartment may want to view apartments near Preston Road.