A mortgage is a loan secured by real estate with the collateral being the property itself.
Prime Lending Rate is a benchmark for interest rates assigned to loans, including mortgages. It is the interest rate that banks charge their most credit-worthy customers such as large corporations. The mortgage interest rate refers to the interest charged annually on a mortgage. Based on interest rate, a portion of a mortgage payment is applied towards the interest due with the remainder going towards paying down the principal balance owed. A fixed interest rate stays the same for the specified term. For example, the rate on a 5-year fixed mortgage remains the same for the 5-year term. A variable rate fluctuates throughout the term of the mortgage, changing when the prime-lending rate changes.
A mortgage term is the duration of the mortgage agreement. At the end of the term, the remaining balance can be paid out, or the mortgage can be renewed with the same lender, or transferred to a different lender at the rates and terms available at that time.
The term differs from the amortization period (am). The am is the time it takes to pay the mortgage out in full based on the mortgage’s current interest rate and payment amount. For example, a mortgage with a 25-year am and a 5-year term would be paid in full in 25 years. However, the term would be over in only 5 years, so the mortgage will need to be renegotiated at that time.
Open Mortgages allow prepayments, early payouts, and conversion into different terms without penalty in accordance with the terms outlined in the mortgage agreement. Convertible Mortgages are normally for 6-month terms and can usually be converted to longer, fixed-terms without penalty. Closed Mortgages usually offer lower rates than open mortgages and provide a fixed payment amount; however, they limit the amount of prepayments and payment increases that can be made without penalty. They are usually available in terms from 6 months to 40 years. If a closed mortgage is paid out early, then there may be a penalty charged as outlined in the mortgage agreement.
Variable Mortgages are usually available in terms from 1 to 5 years. The rate varies according to changes in the prime rate. Usually, the payment amount remains the same, but the distribution of funds between principal and interest vary. The payment amount may have to be increased if interest rates climb past a certain level. Depending on the terms of the VRM, a penalty may apply if the mortgage is paid out prior to maturity.
Refinancing or Equity Take-outs are often done to consolidate and pay off debts with higher interest rates (e.g. credit cards, loans, etc), to obtain funds to invest (e.g. business or real estate investments), or to reinvest funds in the property (e.g. renovations, repairs, upgrades). Renewals are required when the mortgage term is over (matures) and there is still a principal balance outstanding on the mortgage. Mortgagors may choose to refinance with the same lender or take out a new mortgage with a different lender.
An appraisal is a report required by lenders and prepared by a licensed appraiser to determine the value of a property. The appraisal is used to confirm that a property is worth the price being paid at the time of purchase, or to determine the value at the time of refinancing. In some cases, the lender will pay for the appraisal. In others, the applicant is required to pay for it. A market evaluation is prepared by a Realtor for the purposes of determining fair market value. It is based on current listings and recent sales of comparable properties. A home inspection is a thorough inspection by an informed person or home inspection company to evaluate the general condition, structural, and mechanical aspects of the home.
Closing Costs are charges, fees, and adjustments incurred during legal processing of real estate transactions (e.g. legal fees, disbursements, property tax adjustments, interest adjustments, land transfer tax, survey certificates, title searches, etc). The lawyer handles these matters. We'd be happy to provide more detailed information and recommend a professional and experienced real estate lawyer.