Buying your first home can be like learning a new language: there are so many terms you’ve never heard before that it’s enough to make your head hurt. But we, along with the Canada Mortgage and Housing Corporation (CMHC), suggest that you learn some of these real estate terms and what they mean if you’re an aspiring homeowner. The more you know, the better prepared you’ll be.
Adjustable Mortgage Interest Rate
With an adjustable mortgage interest rate, the interest rate and mortgage payment both vary, depending on market conditions. A mortgage with this kind of interest rate is known as an adjustable-rate mortgage (ARM), a variable-rate mortgage or a tracker mortgage.
In real estate, amortization refers to paying off your mortgage. In other words, it refers to making regular payments until your debt to the bank or mortgage lender has been paid in full.
An appraisal is the process of determining how much the property is worth, so that the lending institution can determine how big your loan should be. In Canada, an appraisal can only be done by a member of the Appraisal Institute of Canada or the Canadian National Association of Real Estate Appraisers. A real estate agent can give you an idea of what the property is worth, but this is a market evaluation rather than an appraisal.
When, as a buyer, you sign an assumption agreement, you assume responsibility for the existing mortgage on the home. The seller won’t have any obligations under the mortgage anymore.
A blended payment includes the principal amount and the interest, and the total amount remains the same. So, you pay the same amount every month. Over time, the principal portion of the amount will increase while the interest portion will shrink.
Closing costs are the additional fees that you need to pay on the closing date, when the transaction is finalized and you officially become the new owner of the home. They include legal fees, transfer fees and disbursements, which are fees your lawyer has paid on your behalf and needs reimbursement for.
A conditional offer is an offer to purchase but is subject to certain specified conditions. For example, you offer to purchase the home if you can get a mortgage arranged. There is usually a time limit within which you need to meet the specified conditions.
When you make an offer on a home, the seller may decide not to accept it and to counteroffer instead. The counteroffer will include changes to your original offer, such as the price or the closing date, and your original offer isn’t valid anymore. You’ll be given a specified time limit within which to accept or reject the counteroffer.
A deed, also known as a transfer, is a legal document that says that you are now officially the owner of the property.
Equity is the difference between the market value of your home and the amount you still owe on it. If you sell the home at a profit, equity will be the money you receive after you’ve paid off your mortgage.
Fixed Mortgage Interest Rate
A fixed mortgage interest rate is one that remains the same throughout the term of the mortgage. It doesn’t fluctuate according to market conditions. A mortgage with a fixed mortgage interest rate is called a fixed-rate mortgage (FRM).
A freehold title gives you full, exclusive ownership of the property for an indefinite time period. In contrast, a leasehold gives you the right to the land for only a certain period of time.
A lien is a claim against the property for money owed. For example, you may grant the bank a lien on the property when you take out a mortgage. If you don’t repay your mortgage, the bank then has the right to seize your property. You can also grant a lien to a contractor such as a builder and when you don’t pay for their work, your home may be auctioned off so that they can be paid.
The maturity date is the last day of the term of the mortgage. It’s the day on which you must have paid the loan in full or you must have reached a new agreement with the lending institution.
Mortgage Loan Insurance
In Canada, any residential loan with a loan-to-value ratio of more than 80% has to have mortgage loan insurance. This protects the lending institution such as the bank against losses if you fail to pay your mortgage.
Offer to Purchase
The principal is the amount that you borrow from the lending institution. It doesn’t include interest, so when you budget for your mortgage payments, you need to budget for the principal amount as well as interest.
P.I.T.H. stands for principal, interest, taxes and heating. This amount is used in calculating the gross debt service (GDS) ratio and the total debt service (TDS) ratio.
Vendor Take-Back Mortgage
With a vendor take-back mortgage, the seller finances the mortgage. So, when you buy the home, you make your mortgage payments directly to the seller rather than to the bank or other financial institution.
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