Mortgage Terms

I have compiled some common or popular terms you might come across in the in the mortgage world. Hopefully this will help give you some understanding when situations arise where they are used.

Purchase Plus Improvements

A purchase plus improvement mortgage can be a great option for clients who are looking at a home that needs a bit of updating. Clients can be pre-approved to spend up to a certain amount and if the house they purchase is below this, they can use the additional pre-approval funds to cover some renovations. The only downfall to the product is that the clients must pay for the renovation work up front, complete all of the renovations and then once the renovations are completed the funds will be reimbursed to them. This ensures that all of the renovation money is put into the house.

Here’s an example:

You are pre-approved to spend up to $440,000.00. You write an offer on a home for $400,000.00 but would like to update a bathroom, replace a window, and update flooring on the main floor. You would then need a contractor to go into the house and give you a quote for all of the work that you want done. The contractor gives you a quote for $40,000 which we will send into the lender for your approval.

The house purchase will close and the lawyer will hold back your $40,000 of renovation money. After the work is completed we will send out an appraiser to go to the house and confirm that all of the work has been completed and they will do up an inspection report. Once we send the report into the lender the lender will give the ok to the lawyer to release the $40,000 back to the client.

Variable vs Fixed

You hear a lot about variable vs fixed interest rates. A lot of my clients are unsure what they are and what is best for them.

A variable interest rate is where the interest charged on the mortgage fluctuates based on Prime rate which is controlled by the government and your payment will fluctuate up or down depending on the rate. A fixed interest rate where the interest rate on the loan is set at the beginning of the term and remains the same for the life of the loan.

Closing Costs

Closing costs are the legal and administrative costs incurred to finalize a real estate transaction. Some of them need to be paid up front while others are included in the amount provided to the lawyer at the time of the final document signing.

Some closing costs you might expect on your home purchase include:

• Legal fees and Disbursements – Varies depending on lawyer and value of your home. $1200-$1500 would be a good estimate.
• Title insurance – Most lenders require title insurance to protect against losses in the event of property ownership/title disputes. This is usually around $250
• Property Taxes – You may be required to reimburse the previous property owner if he/she has already paid the property taxes for the full year. You may also be required to “catch up” property taxes with your mortgage lender if you’re paying your property taxes that way.
• Home Inspection – This is optional, but highly recommended and also varies depending on your area and home value. $500 would be a good estimate for this out-of-pocket expense.
• Appraisal – This is not always required, but will be an out-of-pocket expense if necessary, and will cost approximately $400.

Term vs Amortization

Mortgage Term: The mortgage term is the length of time your mortgage contract is in effect.

Terms can range from just a few months to five years or longer. At the end of each term you must renew your mortgage. You’ll likely require multiple terms to repay your mortgage in full. If you pay your mortgage balance in full at the end of your term you don’t need to renew your mortgage.

Vs.

Mortgage Amortization: The amortization period is the length of time it takes to pay off a mortgage in full. The amortization is an estimate based on the interest rate for your current term.

If your down payment is less than 20% of the price of your home, the longest amortization you’re allowed is 25 years. However, if you put down 20% or greater, you can extend this period to 30 years.

Default Insurance

Mortgage default insurance is an insurance policy that compensates a mortgage lender for losses due to the default of a mortgage. A mortgage default means the borrower has not done everything the borrower is required to do under the mortgage agreement. The most common type of default is not making payments. If you are putting a down payment less than 20%, your loan will be subject to default insurance. It can be provided by 1 of 3 companies, CMHC, Sagen, or Canada Guaranty. The default insurance is added on top of your loan and is incorporated into your mortgage payments.

Down Payment

A down payment is the amount of money that you put towards the purchase of a home. The down payment is deducted from the purchase price of your home and the mortgage loan covers the remaining amount.

Mortgage lenders and insurers want to see that you have a down payment and won’t need to take a loan out. It is best to disclose both the amount and where it comes from on your application.

Down payments can come from a variety of places:

1. Cash – Lenders will look at your last 3 bank statements to ensure you have enough money saved for your stated down payments

2. Investments – Lenders require a recent statement of non-registered investments such as stocks, bonds, and GIC’s.

3. RRSP’s

4. Gifts – Your bank statement must show the gifted amount deposited and it will need to be accompanied by a gift letter stating you are not required to pay the money back

If you’re unsure on how much to put down, lets chat! I’d love to get you approved for your new home and work out your down payment details

Appraisal

Whether you are looking to refinance or purchase a new home one thing that the lender I set you up with may need is an appraisal.

Appraisals must be completed by a licensed appraiser. Our lenders require us to order appraisals from their approved list or through an approved appraisal management service.

The cost of an appraisal is typically between $300 and $500.

Property Transfer Tax

In BC we have a tax that is charged to everyone who purchases a home unless you are a first time home buyer and fits the criteria of the exemption. The property transfer tax rate is based on the purchase price and is:

1% of the first $200,000 and 2% thereafter.

Credit Score

A credit score is a 3-digit number that allows lenders to determine a potential borrower’s credit risk. These risks are measured from paying back (or lack of) credit cards or loans.

Typically, you cannot borrow money or receive credit of any kind unless you have a solid credit score. Most mortgage lenders need to see your score at 600 or higher to approve you for a mortgage.