Mortgage: A personal loan used to purchase a property. You pledge the property being purchased as security for the loan.
Down payment: The portion of the purchase price that you pay initially as a lump sum; the rest is financed by your financial institution. A down payment is generally between 5 - 20% of the purchase price.
Principal: The amount of your loan.
Interest: This is added to the amount you have borrowed to compensate the lender for the use of their money. Your mortgage is repaid in regular payments which are applied toward the principal and interest.
Term: The number of months or years the mortgage contract covers (typically six months to five years), during which you pay a specified interest rate.
Amortization: The number of years it will take to repay the mortgage in full. (This is usually longer than the term of the mortgage.) For instance, you may have a five-year term amortized over 25 years.
Equity: The difference between the value of your property and the amount you still owe on the mortgage.
Conventional mortgage: Offered to buyers who make a down payment of 20% or more of the appraised value or purchase price.
Insured mortgage: Offered to buyers with a down payment of less than 20%. This type of loan must be insured against default by the federal government through an approved private insurer (the lender arranges this). The borrower pays a one-time insurance premium to the insurer. The premium is usually added to the principal amount of the mortgage. If you default on your mortgage, the lender is paid by the insurer.
Fixed rate mortgage: The interest rate for a fixed rate mortgage is locked in for the full term of the mortgage. Payments are set in advance for the term, providing you with the security of knowing precisely how much your payments will be throughout the entire term.
Variable rate mortgage: Payments are set for the term, even though interest rates may fluctuate during that time. If interest rates go down, more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to payment of interest.
Open mortgage: Gives you the flexibility to make unlimited pre-payments or lock into a fixed term at any time. This loan’s interest rate changes periodically, and is tied to the prime rate. This type of mortgage is popular when interest rates are expected to fall or remain stable.
Closed mortgage: Mortgage that cannot be prepaid, renegotiated, or refinanced before the end of the term without paying a prepayment charge.
