Mortgage
Mortgage refers to the loan obtained from a lender to purchase, maintain, or build a real estate property like land, home, building, and other various types of tangible real estate assets. The real estate entity for which the loan is sanctioned serves as collateral and is held by the lender. Thus, in turn, depending on the type of mortgage and whether it is a long-term or short-term loan, the borrower sign in a contract to pay off the mortgage amount with periodic payments that eventually pay off the debt. Before the mortgage is finalized, the lender does rigorous verification and underwriting about both borrower and real estate asset. When documents are completed and signed in the closing phase, the mortgage lender legally becomes the lienholder against your real estate property. In case of mortgage default, being a lienholder, the lender can seize your real estate property and sell it as a foreclosure to recover the invested amount. Once this debt is paid off entirely, including principal and interest amounts, and with a proper procedure based on the lender’s requirements, this lien becomes null and void, and the property owner gets 100% right.
Mortgage Term
Typically, a mortgage term is a period spanning over years or months that the borrower is in contract with the lender. Terms can vary from the couple for months (short time loans), five years (a most popular one), or even longer. Every mortgage taken out has specified interest rates, payment due schedules, and other associated privileges.
When the length of the term expires, the borrower still owes the outstanding money to the lender. Now, the borrower can either renew the mortgage or repay the remaining principal in a one-time payment.
Down payment for real estate means any money the buyer of real estate property makes available to be paid upfront to make the purchase happen. When buyers contribute higher cash towards their purchase’s downpayment, the remainder of the money they need to borrow from the lender as the mortgage will be lower; hence, their loan’s interest rate and payments will be lower. And the inverse of this is true as well. But depending on the borrower’s finances, the lender might require them to pay 0 to 50 percent of purchase prices as the down payment.
Loan To Value (LTV) Ratio
LTV Ratio is the percentage used in mortgage lending to calculate the value of the property or real estate assets being mortgaged. A high LTV ratio is perceived as a higher risk by the lender as the borrower has less investment in the purchase, and if the value falls or the property goes for foreclosure, the whole burden will be on the lender. Moreover, if the borrower applies for a loan amount near the property’s appraised value, i.e., offering less towards the down payment, the lender might rank it at a high risk of defaulting.
LTV Ratio = Mortgage Amount / Appraised Value of Property
Conventional Mortgage
In a conventional mortgage scenario, the purchaser pays upfront at least 20 percent of the property’s sales price as the down payment. The lender will regard it as a higher confidence transaction as the borrower shows higher commitment towards the purchase.
High Ratio Mortgage
When the buyer puts less than 20 percent of the property’s sales price toward the down payment, it might fall under the high ratio mortgage category. Additionally, this will require the borrower to purchase mortgage default insurance, which protects lenders even where the borrower defaults on their required mortgage payments.
Suppose the buyer purchases some property with undetermined issues. In that case, the lender might appraise the property for less than what it was listed for, thereby reducing the loan value offered to the buyer. Now buyer might have to put a large sum towards the down payment of the property to cover that gap.
Mortgage Rate
When a lender lends money to a borrower for real estate, they charge a certain interest rate on the mortgage. And it is a primary factor when it comes to determining the value of a mortgage being offered. These rates are determined by lenders directly but can be highly influenced by government policies and procedures. The mortgage interest rate can either be fixed, i.e., staying consistent throughout the mortgage term, or variable, i.e., adjusted periodically throughout the mortgage term based on the current mortgage and economic market.
Based on the borrower’s credit history, a lender will factor in all the risk, i.e., how likely a borrower is to pay back or default this loan when issuing the mortgage to the borrower. Therefore, the mortgage rate offered can vary from one borrower to another.
Fixed-Rate Mortgage
As specified by the name, the mortgage interest rate stays constant from the beginning till the end of the term. Fixed rates don’t fluctuate based on the market and economics, regardless of if it is facing a downtrend or an uptrend. These rates are usually preferred by the mortgagors who plan to buy a home or real estate for the long term. Moreover, these nonfluctuating rates predict how much people will be paying periodically over the mortgage term over the entire loan life. Fixed-rate also helps to protect from the rise in mortgage payments if the interest rate rises in the market.
Variable Rate Mortgage
A variable-rate mortgage is the category of real estate loans in which the interest rate for the mortgage fluctuates periodically based on the market conditions. The change in the variable rate of the mortgage is highly dependent on the prime rate or prime lending rate of the major Canadian banks and financial institutions, which is determined by the policy interest rate levied by the Bank of Canada. Therefore, if the prime rate changes, your mortgage’s interest rate changes and corresponding adjustments are made to the mortgage payments due.
Amortization
Amortization means gradually paying off the debt over time by periodic payments until the whole mortgage is paid off in full, including principal and interest amounts. Amortization can typically range from five to thirty years, and the longer the amortization is, the lower is the mortgage payment. Still, again it depends on other factors too. Amortization helps to get a clear picture of what portion of the monthly payment is going towards the principal and interest individually.
Fully Amortized Mortgage
A fully amortized mortgage is a loan whereby making periodic payments towards interest and principal amount owed as specified in the amortization schedule, the borrower pays off the whole debt by the end of the set term. The amortization schedule is expressed in a table format that shows each monthly payment over the specific term, helping lenders and borrowers keep track of loan payments and related financials. In this type of mortgage, the term and the amortization of the mortgage are the same.
Partially Amortized Mortgage
A partially amortized mortgage is a loan where the borrower pays the principal and interest amount, but these installments are not enough to pay off the whole loan by the end of the set term. Once the term ends, either borrower can make a balloon payment, i.e., pay off in full, or renew the mortgage for another term to pay off the remaining debt. Hence, even if amortized for 25-30 years, the mortgage will have small individual terms that will be renewed on an ongoing basis.
