Home ownership is one of the most stressful and complicated activities most of us will engage in. The initial search for that house and the mortgage that comes with it is extremely daunting. Many of the clients I deal with don’t have a complete understanding of the terms involved in a real estate purchase. I am constantly astounded by some of the questions I get both at initial interviews and at closing. I always take the time to explain to my clients what the various options are and the implications of those same options. Listed below are some common mortgage terms. This is not by any means a complete list, but it is a solid place to start if you are looking for initial answers.Agreement of Purchase and Sale: The legal agreement that offers a price on a home. The agreement may be conditional or firm.
Amortization Period: The amount of time it will take to pay the mortgage off. Typically this is 25 years.
Appraisal: Required to determine the value of the property.
Blended Payments: These payments consist of both principal and interest portions. As payments are made the principal portion increases while the interest portion decreases.
Closed Mortgage: A Mortgage that can’t be prepaid, or refinanced before it’s maturity date.
Closing Costs: Expenses related to closing a mortgage. These can include legal fees, property land transfer taxes. It is usually wise to budget 1.5% of the purchase price.
Deposit: An amount of money placed in trust by the purchaser when making an offer on a property.
Firm Offer: An offer to purchase a property with no conditions.
Fixed-Rate Mortgage: A mortgage that has a fixed interest rate for a period of time (term).
Maturity Date: The last day of the term of the mortgage.
Mortgage Term: The period of time that you pay a certain interest rate.
Open Mortgage: A Mortgage which can be prepaid at any time, without penalty.
Payment Frequency: The schedule you select to make payments, weekly, bi-weekly, twice monthly, or monthly.
Principal: The amount of money your borrow for your mortgage.
Term: The length of the current mortgage agreement.
Variable Rate Mortgage: A mortgage that’s interest rate may change based upon market conditions. Often referred to as a float rate mortgage.
{ 5 comments… read them below or add one }
cave2626 10.31.08 at 8:34 am
Neil, I wish there were more people in the financial industry who were like you. When I got my first mortgage it was a nightmare. When it came time to move again and go through the mortgage process a second time, I ask so many more questions. And for the most part the bankers were good but it’s tough to ask questions if you don’t really know what to ask. I found that talking with as many people as possible really helped. As you’ve said, most people have mortgages. Learn from the shared experience. Having a list of mortgage terms would have been useful then and will be useful next time. Thanks.
Eric Hamm 10.31.08 at 7:16 pm
Thanks for sharing this useful info, Neil.
My wife and I bought our home when the housing bubble was still blowing up. So our house is worth a little less than we owe, but not too bad. The purchasing wasn’t a complete nightmare or anything, but we certainly found it overwhelming when it came to trying to understand all the ins and outs of buying a home.
Once again, great info, very helpful. Eric.
Neil 10.31.08 at 7:39 pm
Cave -> I aim to have everyone who leaves my office leave with a little bit more knowledge. I’ve dealt with too many customers who have confused Open vs Closed with Fixed vs Variable and that can be a dangerous set of terms to confuse.
Eric -> The housing bubble in the US has been a nightmare (I’m in Canada and we haven’t had our bubble burst, yet). However, housing prices should eventually rise back up. In the meantime remember that every payment gets you close to developing that equity in the home.
Barbara Swafford 11.01.08 at 3:14 am
Hi Neil – It sounds like you do a fabulous job. Your clients are lucky to have someone like you to “hold their hand”.
I notice you said you’re in Canada. Here we often have prepayment penalties thrown into a mortgage. Do you have that, too? Those could be a real nightmare for someone if they’re not aware of it.
Neil 11.01.08 at 9:33 am
Barabara -> We have prepayment policy built into our mortgages here as well. That’s what the open/closed referes to.
A Closed mortgage will typically allow you to prepay 15% of the original mortgage amount per calendar year.
An Open mortgage will allow you to prepay as much as you would like. You can even discharge the mortgage though an administration fee will usually apply.