Mortgage Glossary
Discover the meaning of mortgage industry terminology.
Acceleration
The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale Clause.
Adjustable rate mortgage (ARM)
An interest rate that can change periodically. As rate move up and down the rate on your mortgage can also go up and down during the term. As a result the monthly payment can also rise and fall with the change in interest rates. The most common type of variable rate mortgage (VRM) is prime rate less .9%.
Adjustment interval
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or six months, depending on the index.
Agreement of Purchase and Sale
A legal agreement that offers a certain price for a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).
Amortization
Means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
Annual percentage rate (A.P.R.)
Is a interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account point and other credit cost. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.
Appraisal
An estimate of the value of property, made by a qualified professional called an "appraiser".
Appraisal Value
An estimate of the market value of the property.
Assessment
A local tax levied against a property for a specific purpose, such as a sewer or street lights.
Assumption
The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply.
Balloon (payment) mortgage
Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage.
Blended Payments
Payments consisting of both a principal and an interest component, paid on a regular basis (e.g. weekly, biweekly, monthly) during the term of the mortgage. The principal portion of payment increases, while the interest portion decreases over the term of the mortgage, but the total regular payment usually does not change.
Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client buy who does not loan the money himself. Brokers usually receive a commission for their services paid by the lender.
Buy-down
When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
Canada Mortgage and Housing Corporation (CMHC)
The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.
Cash Flow
The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc).
Caps (interest)
Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.
Caps (payment)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee and other costs assessed at settlement. The cost of closing usually are about .5 to 1.5% of the purchase price.
Closed Mortgage
Requires you to maintain a specific payment schedule for terms 1 to 25 years. Their is usually a penalty if you repay the mortgage in full before the end of your term.
Canada Mortgage and Housing Corporation (CMHC)The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.
Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender with specific terms or conditions. An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paper work or compliance with stated conditions.
Construction loan
A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he progresses.
Contract sale or deed
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.
Conventional loan
A mortgage not insured by
CMHC,
Genworth or
AIG. Typically a mortgage under 80% loan to value.
Convenant
A clause in a loan agreement written to protect the lender's claim by keeping the borrower's financial position approximately the same as it was at the time the loan agreement was made. Essentially, covenants spell out what the borrower may do and must do in order to satisfy the terms of the loan. For example, the borrower may be prohibited from issuing more debt by using certain assets as collateral.
Convertable Mortgage
Closed mortgage that allows you to renew your mortgage at any time without penalty for a longer term. The most common is a 6 month convertible. For the first 6 months, your rate will be the same and you have the choice to convert the mortgage to a longer term with no penalty.
Credit Report
A report documenting the credit history and current status of a borrower's credit standing.
Click here to view our Credit Reports page.
Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio. Also known as TDS.
Deed of trust
In many states, this document is used in place of a mortgage to secure the payment of a note.
Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
Deferred interest
When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.
Delinquency
Failure to make payments on time. This can lead to foreclosure.
Deposit
A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor's agent, broker, lawyer or notary until the closing of the transaction.
Discount Point
See point.
Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount.
Due-on-Sale-Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Earnest Money or Deposit
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Equity
The difference between the fair market value and current indebtedness, also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property.
Escrow
An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.
First Mortgage
A real estate loan with the right to payment in full before payments to other lenders are made. First mortgages are generally considered low-risk investments, although the quality of real estate pledged as collateral is of crucial importance in determining the risk level of the mortgage.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
Guaranty
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio. Also known as GDS.
Impound
That portion of a borrower's monthly payments held by the lender to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
Interim Financing
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
Investor
A money source for a lender.
Lien
A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. Also known as LTV.
Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Market Value
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
MIP (Mortgage Insurance Premium)
It is insurance from CMHC or GE to the lender against incurring a loss on account of the borrower's default.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 25 percent. See private mortgage insurance, MIP mortgage insurance.
Mortgagee
The lender
Mortgagor
The borrower or homeowner
Negative Amortization
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.
Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt, as a mortgage note.
Open Mortgage
Allows you to pay the principle in part or in full at any time without penalty. They usually have a higher rate of interest than a closed term mortgage, because of the flexibility.
Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.
Permanent Loan
A long term mortgage, usually ten years or more. Also called an "end loan."
PIT Mortgage
Principal, Interest and Taxes all in one payment.
Pledged account Mortgage (PAM)
Money is placed in a pledged savings account and this fund plus earned interest is gradually used to reduce mortgage payments.
Points (loan discount points)
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Prepaid Expenses
Necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) for different mortgages. The most common penalty is a three month interest penalty.
Primary Mortgage Market
Lenders making mortgage loans directly to borrower's such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets.
Principal
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 25 percent down payment, lenders will allow a smaller down payment - as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on you loan's structure.
Realtor®
The term REALTOR® refers to real estate professionals in Canada who are members of the Canadian Real Estate Association (CREA).
Recision
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.
Restrictive Covenant
A limitation placed upon the use of property contained in the deed or other written instrument in the chain of title. More specifically, a restrictive covenant is a contract between two landowners, by which the person obtaining the promise (the covenantee) acquires the right to restrain the covenantor from putting the land to certain specific uses. Such contracts between landowners run with the land.
Recording Fees
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
Renegotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."
Secure Mortgage Application
When applying for a mortgage online make sure the web page starts with "https" and not "http" This is the only way to make sure your privacy is guaranteed!!! ... We use Thawte to secure our applications. Your information is safe and secure. Commonly known as "SSL" which means "Secure Socket Layer". This is a very secure type of encryption that is used to make sure that a connection is secure before a viewer gives their personal information etc. online. "SSL" is layered beneath application protocols such as HTTP, SMTP, Telnet, FTP, Gopher and NNTP, and layered above the connection protocol TCP/IP.
Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one.
Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders. Security.
Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.
Settlement/Settlement Costs
See closing/closing costs.
Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrowers shares the monthly principal and interest payments with another party in exchange for part of the appreciation
Simple Interest
Interest which is computed only on the principle balance only.
Survey
The process by which boundaries are measured and land areas are determined; the on-site measurement of lot lines, dimensions, and position of houses in a lot including the determination of any existing encroachments or easements.
Sweat Equity
Equity created by a purchaser performing work on a property being purchased.
Title
The lawful ownership of property; also, the means of evidence by which the owner has lawful ownership thereof.
Title Insurance
A comprehensive contract of indemnity under which the title company agrees to reimburse the insured for any loss if the title is not as represented in the policy.
Title Search
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Truth-In-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.
Two-Step Mortgage
A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years. Also called "Super Seven" or "Premier" mortgage.
Underwriting
The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
Usury
interest charged in excess of the legal rate established by law.
Variable Rate Mortgage (VRM)
A variable rate mortgage is a mortgage rate based on the lenders prime rate. The rate usually fluctuates with Bank of Canada's Prime Rate. When prime goes down, your rate will also go down and if the prime rate goes up, your rate will go up. Your rate should change when your lenders rate changes. Some lenders will change your rate on the first of each month if the rate changes, and some make the change every three months.
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment (VOE)
A document signed by the borrower's employer verifying his/her position and salary.
Warehouse Fee
Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.
Wraparound mortgage
A method of refinancing in which the new mortgage is placed in a secondary or subordinate position. In essence, it is an additional mortgage in which another lender refinances a borrower by lending an amount over the existing first mortgage amount, without cashing out or distributing the existence of the first mortgage.
