Ten Mortgage Terms You Should Know
October 30, 2012 | Posted by: Laurie Anne Faulkner
Ten Mortgage Terms you Should Know
Gross Debt Service – or Monthly Mortgage Payment including Taxes and Heat.
This is a way of estimating the maximum home-related expenses you can afford to pay each month. ( monthly mortgage payment, heat
Most lenders feel that between 32% to 34% of your monthly income before taxes is an acceptable level of debt for this payment. The Maximum Gross Debt Service one can use is 39%.
Total Debt Service - or Monthly Mortgage Payment including Taxes, Heat and all other Monthly Debt Payments ( credit cards, student loans, car payments etc).
This is an estimate of the maximum debt load you can carry each month. Depending on the lender this number cannot exceed between 40% and 44% of your gross monthly household income.
If your Total Debt Service is more than the maximum amount you will need to either pay down debt before obtaining a new mortgage or purchase at a lower price so the ratios are in line with the lender's risk tolerance.
Amortization – or how long it will take you to pay off the mortgage in years
Amortization is the estimated number of years it will take to pay off your mortgage entirely. Amortization periods range up to 30 years. The longer your amortization is, the lower your mortgage payments will be, but the higher the total amount of interest you’ll pay over the life of the mortgage. Lengthening your amortization can also increase your maximum purchase price.
Unlike an open mortgage which you can pay out at any time without any costs, a closed mortgage means that during the term that you have chosen ( 1, 3, 5 years etc…), there are certain restrictions on the amount you can pre-pay (that is, pay over and above the number of your regular payments) on your mortgage balance. If you pay your mortgage off before the term is over or pay more than allowable under our pre-payment options, you may be subject to a pre-payment penalty. Both Fixed and Variable rate mortgage can be “Closed” mortgages.
Fixed Rate Mortgage
With a fixed rate mortgage, you lock-in your mortgage interest rate to a specified rate for a term ranging from 6 months to 10 years. Your payments stay the same over this time, and you don’t have to worry about fluctuations in your interest rate.
Variable Rate Mortgage
With a variable rate mortgage, your mortgage interest rate is based on the Bank Prime rate (which is the base interest rate from which the Bank sets all the rest of its interest rates). Your interest rate will fluctuate as the Bank Prime goes up and down, although your regular mortgage payments will stay the same (unless the amount of your payment isn’t enough to cover the interest). You can choose a term of 3 to 5 years for a variable rate mortgage. You can convert a variable rate mortgage to a fixed rate at any time during your term without additional cost.
A mortgage term is the length of time you have agreed to a certain interest rate and a specified payment schedule. A term can range from as short as 6 months to as long as 10 years. At the end of your term, also known as renewal, you can agree to a new interest rate and payment schedule, or you can pay off your mortgage. This is different from the amortization which is how long your mortgage is stretched out
High Ratio Mortgage
If your down payment is less than 20% of the value of the property, the mortgage is considered a high-ratio mortgage and mortgage loan insurance must be purchased. Mortgage loan insurance protects the lender against the mortgage being defaulted, and the cost of the insurance premium is passed on to you. You can pay it in one lump sum or it can be added onto your mortgage and included in your regular mortgage payment. The amount varies depending on the amount of down payment between 5% and 20% and the amortization of the new mortgage.
A mortgage that does not exceed 80% of the purchase price of the home. There are ‘NO” insurance premiums added to a conventional mortgage
A pre-approved mortgage is a tentative determination by the lender to loan you a certain amount of money. It is not a final decision and is usually only valid for 90 to 120 days. The final decision may depend upon whether the appraisal of the real estate is high enough to protect the lender in the case of default, whether the title is clear, whether the property meets inspection standards, plus a number of other factors. Knowing how much you are able to spend before purchasing a home is always a good idea, with a pre-approved mortgage, you know exactly where you stand before shopping for a home.
If you are ready to start your mortgage Pre-Approval call Laurie Anne at 250-588-2288.