A mortgage document is a complex document loaded with terms that simply fly over peoples’ heads. We’ve put together a list of terms you’d often find in your mortgage documents, and tried to define the terms. Hope you’d find the information helpful.

Fixed Rate Mortgage

A fixed-rate mortgage is a type of mortgage loan in which the interest rate remains constant throughout the term of the loan. This means that the borrower’s monthly mortgage payment remains the same, regardless of changes in the market interest rates.

Fixed-rate mortgages are popular among homeowners because they provide a predictable monthly payment that remains stable over time, making it easier to budget and plan for future expenses.

Fixed-rate mortgages are typically available in a range of term lengths, such as 15 years, 20 years, or 30 years. The longer the term length, the lower the monthly payment will be, but the more interest the borrower will pay over the life of the loan.

One advantage of a fixed-rate mortgage is that the borrower is protected against interest rate hikes in the future. Even if interest rates rise in the market, the borrower’s interest rate and monthly payment will remain the same. However, if interest rates fall, the borrower will not benefit from lower payments unless they refinance their mortgage.

Fixed-rate mortgages are a good choice for borrowers who plan to stay in their home for a long period of time and who value the stability of a fixed monthly payment. Before choosing a fixed-rate mortgage, it’s important to compare the interest rates and terms offered by different lenders to ensure that you are getting the best deal possible.

Variable Rate Mortgage

A variable rate mortgage, also known as an adjustable-rate mortgage (ARM), is a type of mortgage loan in which the interest rate can fluctuate over the life of the loan. The interest rate is typically based on an index, such as the prime rate plus a margin that is set by the lender.

With a variable rate mortgage, the borrower’s monthly payment can change over time as the interest rate changes. When interest rates are low, the borrower’s monthly payment may be lower than with a fixed-rate mortgage, but when interest rates rise, the borrower’s monthly payment can increase.

Variable rate mortgages typically have an initial fixed period, during which the interest rate is fixed for a certain number of years, such as five or seven years. After the initial fixed period, the interest rate can adjust annually or more frequently, depending on the terms of the loan.

One advantage of a variable rate mortgage is that the initial interest rate is often lower than the interest rate on a fixed-rate mortgage, which can make the monthly payment more affordable. Additionally, if interest rates decline in the future, the borrower’s monthly payment will decrease as well.

However, variable rate mortgages come with more uncertainty than fixed-rate mortgages, as the borrower’s monthly payment can change over time. If interest rates rise significantly, the borrower’s monthly payment can become unaffordable, which can lead to financial stress or even default on the loan.

Before choosing a variable rate mortgage, it’s important to carefully consider your financial situation and to understand the potential risks and benefits of this type of loan. It’s also important to compare the terms and interest rates offered by different lenders to ensure that you are getting the best deal possible.

Mortgage Insurance

Mortgage insurance is a type of insurance that protects lenders in the event that a borrower defaults on a mortgage loan. It is typically required for borrowers who make a down payment of less than 20% of the home’s purchase price.

Mortgage insurance is designed to protect lenders by reducing their risk of loss in the event of default. If the borrower defaults on the loan, the insurance company will pay the lender a portion of the outstanding balance, which can help to mitigate the lender’s losses.

While mortgage insurance can add to the cost of a mortgage, it can also make it possible for borrowers to qualify for a mortgage with a smaller down payment, which can be an advantage for those who are unable to save enough for a larger down payment. It’s important for borrowers to carefully consider the costs and benefits of mortgage insurance and to discuss their options with their lender or a qualified financial advisor.

Mortgage Amortization

Mortgage amortization refers to the process of gradually paying off a mortgage loan over time through a series of regular payments. Each payment is made up of both principal (the amount borrowed) and interest (the cost of borrowing the money).

The term “amortization” refers to the process of spreading out the payments for a loan over a set period of time. With a mortgage, the amortization period is typically 25-30 years, although it can be shorter or longer depending on the terms of the loan.

At the beginning of the loan term, most of the monthly payment goes toward paying the interest on the loan, while only a small portion goes toward reducing the principal balance. Over time, however, as more principal is paid down, a larger portion of each payment goes toward reducing the principal, and less goes toward paying interest. This process continues until the loan is fully paid off.

Mortgage amortization schedules show how each payment is allocated between principal and interest over the life of the loan, and can be useful in helping borrowers understand how much of their payments are going toward reducing their debt versus paying interest.

Mortgage Commitment Letter

A mortgage commitment letter is a written agreement between a lender and a borrower that outlines the terms of a mortgage loan that the lender has agreed to provide to the borrower. It is also sometimes referred to as a loan commitment letter.

The mortgage commitment letter typically includes important details such as the loan amount, interest rate, term of the loan, repayment schedule, and any conditions or contingencies that the borrower must meet before the loan can be finalized. It is a formal document that indicates that the lender has completed its due diligence on the borrower’s creditworthiness, income, and assets, and is willing to lend the requested funds.

Before issuing a mortgage commitment letter, lenders typically require borrowers to complete a mortgage application, provide documentation to verify their income and assets, and undergo a credit check. Once the lender has reviewed this information and determined that the borrower meets its underwriting criteria, it will issue a mortgage commitment letter.

Receiving a mortgage commitment letter is an important milestone in the homebuying process, as it signals that the borrower has secured financing and can move forward with the purchase of the home. However, it is important to note that the commitment letter may include conditions that must be met before the loan can be finalized, such as providing additional documentation or satisfying other requirements.

Debt Consolidation Mortgage

A debt consolidation mortgage is a type of mortgage loan that allows borrowers to combine multiple debts into one loan, typically with a lower interest rate and a longer repayment term. The goal of a debt consolidation mortgage is to simplify the borrower’s finances and reduce their monthly payments by consolidating high-interest debts, such as credit card balances or personal loans, into a single loan with a lower interest rate.

With a debt consolidation mortgage, the borrower uses the loan proceeds to pay off their existing debts, leaving only the mortgage loan to be repaid. This can be an effective strategy for borrowers who are struggling to keep up with multiple debt payments and want to simplify their finances.

Debt consolidation mortgages typically offer lower interest rates than other types of loans, such as credit cards or personal loans, because they are secured by the borrower’s property. However, it is important to note that taking out a debt consolidation mortgage will increase the total amount of interest paid over the life of the loan, since the borrower is extending the repayment period.

Additionally, if the borrower is unable to keep up with the mortgage payments, they risk losing their home, as the property is used as collateral for the loan. As with any financial decision, it is important to carefully consider the pros and cons of a debt consolidation mortgage and to seek advice from a qualified financial professional before proceeding.

Home Equity

Home equity refers to the portion of a property’s value that is owned outright by the homeowner, or the difference between the property’s market value and the outstanding balance of any mortgages or other liens on the property.

For example, if a home is worth $500,000 and the outstanding mortgage balance is $300,000, the homeowner has $200,000 in home equity.

Home equity can be built up over time through a combination of paying down the mortgage, making home improvements that increase the property’s value, and appreciation in the local real estate market.

Home equity can be a valuable asset for homeowners, as it can be used to obtain home equity loans or lines of credit, which can be used to finance major expenses such as home renovations, education costs, or debt consolidation.

It is important to note that tapping into home equity comes with risks, as using the home as collateral for a loan could result in the loss of the property if the borrower is unable to make the loan payments. Homeowners should carefully consider their financial situation and their ability to repay any loans before using their home equity.

What is Mortgage Title Insurance

Title insurance is a type of insurance policy that protects homeowners and lenders against any defects or issues with the title of a property. In Canada, title insurance is typically purchased by the buyer of a property at the time of closing, although lenders may also require it as a condition of the mortgage.

Title insurance in Canada provides protection against a wide range of potential issues with the title of a property, including:

1. Title fraud: This is when someone falsely represents themselves as the owner of a property and sells the property to an unsuspecting buyer.
2. Encroachment issues: This is when a structure or feature on a property (such as a fence or driveway) extends onto a neighboring property, potentially leading to legal disputes.
3. Zoning violations: This is when a property does not comply with local zoning regulations, such as building codes or setback requirements.
4. Outstanding liens: This is when there are unpaid debts or taxes on the property that could result in legal action against the owner.
5. Other title defects: This can include issues such as undisclosed easements, surveys that show a different property line, or unresolved boundary disputes.

Title insurance policies in Canada typically have a one-time premium that is paid at the time of closing and provides coverage for the duration of the ownership of the property. The cost of the policy can vary depending on factors such as the location and value of the property, as well as the type of policy purchased.

While title insurance is not mandatory in Canada, it can provide important protection against unexpected issues with the title of a property. It’s important for buyers to carefully review the terms of their title insurance policy and to understand the coverage provided.

Mortgage Prepayment

Mortgage prepayment refers to the act of paying off part or all of your mortgage before the scheduled due date. This can be done as a lump sum payment or by increasing the regular payments made towards the mortgage.

Mortgage prepayment can be beneficial for a number of reasons, including:

1. Saving money on interest: By prepaying your mortgage, you can reduce the amount of interest that you pay over the life of the loan.
2. Paying off your mortgage sooner: Prepaying your mortgage can help you pay off the loan faster and potentially become debt-free sooner.
3. Building equity in your home: By paying down your mortgage faster, you can increase the amount of equity that you have in your home.
4. Improving your credit score: By making consistent prepayments on your mortgage, you can demonstrate responsible financial behavior and improve your credit score over time.

It’s important to note that some mortgage lenders may charge prepayment penalties if you pay off your mortgage before the scheduled due date. These penalties can vary depending on the terms of your mortgage, so it’s important to review your mortgage agreement and speak with your lender to understand any potential penalties.

Overall, mortgage prepayment can be a useful strategy for reducing debt and building equity in your home, but it’s important to carefully consider the costs and benefits before making any additional payments towards your mortgage.

Owner Financing Mortgage

Owner financing is a type of mortgage where the seller of a property provides financing for the buyer, rather than the buyer obtaining a mortgage from a traditional lender, such as a bank or credit union. With owner financing, the seller essentially acts as the lender and provides financing to the buyer to purchase the property.

In an owner financing mortgage, the terms of the loan are typically negotiated between the buyer and the seller, and can vary depending on the needs and preferences of both parties. The seller may require a down payment and may charge an interest rate on the loan, as well as establishing a repayment schedule that works for both parties.

Owner financing can be beneficial for both buyers and sellers, as it can provide an alternative financing option for buyers who may not qualify for traditional mortgages, and can allow sellers to sell their property more quickly and potentially earn a higher return on investment. Additionally, owner financing can offer more flexibility in terms of the repayment schedule and interest rate, as the terms of the loan are negotiated directly between the buyer and seller.

However, owner financing also comes with some potential risks and drawbacks, including the potential for default and foreclosure if the buyer is unable to make the payments, as well as potential legal and financial risks for both parties. It’s important for both buyers and sellers to carefully review and negotiate the terms of an owner financing mortgage, and to seek legal and financial advice as needed.

Bridge Mortgage

A bridge mortgage is a type of short-term loan that is used to bridge a financial gap between the purchase of a new property and the sale of an existing property. It is essentially a temporary loan that provides funds to the borrower until the sale of their current property is complete, at which point the borrower can pay off the bridge mortgage in full.

Bridge mortgages can be useful for homeowners who are looking to purchase a new property before they have sold their current property, as they can provide the necessary funds to make a down payment or cover other expenses related to the new property. Bridge mortgages are typically short-term loans with higher interest rates than traditional mortgages, and may have additional fees and charges associated with them.

Bridge mortgages are secured by the borrower’s existing property, and the loan amount is typically based on the equity in the property. The loan term for a bridge mortgage is typically between 6 months and 2 years, and the borrower may be required to make interest-only payments during the term of the loan.

It’s important to note that bridge mortgages come with some risks, including the potential for higher interest rates and fees, as well as the risk that the borrower’s existing property may not sell as quickly as expected, leaving them with a larger debt than anticipated. Before considering a bridge mortgage, it’s important to carefully review the terms and fees of the loan, and to speak with a financial advisor or mortgage professional to ensure that it is the right financial decision.

Mortgage Closing Costs

Mortgage closing costs in Canada are the fees and expenses that are associated with the process of closing a mortgage loan. These costs can vary depending on a number of factors, including the lender, the type of mortgage, the location of the property, and the borrower’s credit score and financial situation.

Some common closing costs for a mortgage in Canada may include:

1. Appraisal fees: This is the cost of having a professional appraiser assess the value of the property to ensure that it is worth the amount of the loan.
2. Home inspection fees: This is the cost of having a professional home inspector assess the condition of the property to identify any potential issues or repairs that may be needed.
3. Legal fees: This is the cost of hiring a real estate lawyer to handle the legal aspects of the mortgage closing process, such as preparing and reviewing the mortgage agreement and closing documents.
4. Title insurance: This is a type of insurance that protects against any legal issues or defects with the title of the property.
5. Land transfer tax: This is a tax that is imposed by the provincial government when a property changes ownership.
6. Mortgage registration fee: This is the fee that is charged by the provincial government to register the mortgage on the property.
7. Property insurance: This is the cost of purchasing insurance to protect the property against damage or loss.

In general, closing costs can add up to anywhere from 1% to 5% of the total mortgage amount. It’s important for borrowers to carefully review the closing costs associated with their mortgage and to budget accordingly to ensure that they can afford the costs in addition to their down payment and ongoing mortgage payments.