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    By




    On 10th January, 2004 on a very cold Saturday afternoon a group of 25-30 Canadian Desi’s met in Toronto for the first ever meeting of Canadian Desi.com members to interact with each other and to discuss how and what Desi’s can do to help each other fellow Desi’s. It was heartening to note that the warmth of the members and their desire to do something for the community was so overwhelming that every one forgot about the coldest day of the season and offered to help each other by contributing with the richness of their professional expertise and experiences from their field.

    I am a mortgage professional and here is my humble effort to inform our new immigrants & those who are presently renting but hope to buy their dream house in near future about the various basic aspects of Mortgages, closing costs, Credit Ratings (Do’s & Don’ts) Refinance and Equity Take outs etc. The first article in this series is a very basic introduction to mortgage and various terms used by the lenders (Banks & other financial institutions).

    What is a mortgage?
    A mortgage is a loan that uses a property as security to ensure that the debt is repaid. The borrower is referred to as the mortgagor, the lender as the mortgagee. The actual loan amount is referred to as the principal, and the mortgagor is expected to repay that principal, along with interest, over the repayment period (amortization) of the mortgage.

    A mortgage can be used for financing many different things, including:
    • Purchasing or constructing a new home
    • Purchasing an existing home
    • Refinancing to consolidate debts
    • Financing a renovation
    • Financing the purchase of other investments
    • Financing the purchase of investment property

    Since a mortgage is a fully secured form of financing, the interest you pay is usually less than with most other types of financing. Many people use the equity in their homes to finance the purchase of investments. Using a Secured Line of Credit, or a fixed-rate mortgage, the interest costs are lower, and they can even write off those interest costs against their taxable incomes. I am giving below most of the terms you will come across when taking a mortgage. A very simple explanation of each term is given, however, if any one needs detail explanation then he/she can contact me directly.

    Agreement of Purchase and Sale:
    The legal contract a purchaser and a seller go into. We recommend that you have your offer prepared by a professional realtor that has the knowledge and experience to satisfactorily protect you with the most suitable clauses and conditions.

    Amortization Period:
    The number of years it takes to repay the entire amount of the financing based on a set of fixed payments.

    Appraisal:
    The process of determining the value of a property.

    Assets:
    What you own or can call upon. Often used in determining net worth or in securing financing.

    Assumption Agreement:
    A legal document signed by a buyer that requires the buyer assume responsibility for the obligations of an existing mortgage. If someone assumes your mortgage, make sure that you get a release from the mortgage company to ensure that you are no longer liable for the debt.

    Blended Payments:
    Equal payments consisting of both an interest and a principal component. Typically, while the payment amount does not change, the principal portion increases, while the interest portion decreases.

    Canada Mortgage and Housing Corporation (CMHC):
    CMHC is a federal Crown corporation that administers the National Housing Act (NHA). Among other services, they also insure mortgages for lenders that are greater than 75% of the purchase price or value of the home. The cost of that insurance is paid for by the borrower and is generally added to the mortgage amount. These mortgages are often referred to as "Hi-Ratio" mortgages. There is also a private institution (GEMICO) that insures the mortgage and has the same premiums as of CMHC.

    Closed Mortgage:
    A mortgage that cannot be prepaid or renegotiated without pre-payment penalty.

    Closing Date:
    The date on which the new owner takes possession of the property and the sale becomes final.

    Conventional Mortgage:
    A mortgage up to 75% of the purchase price or the value of the property. A mortgage exceeding 75% is referred to as a "Hi-Ratio" mortgage and the lender will require insurance for that mortgage.

    Collateral:
    An asset, such as term deposit, Canada Savings Bond, or automobile that you offer as security for a loan.

    Credit Scoring:
    A system that assesses a borrower on a number of items, assigning points that are used to determine the borrower's credit worthiness. I will write in detail on this subject in another article.

    Demand Loan:
    A loan where the balance must be repaid upon request.

    Deposit:
    A sum of money deposited in trust by the purchaser on making an offer to purchase. When the offer is accepted by the vendor (seller), the deposit is held in trust by the listing broker, lawyer, or notary until the closing of the sale, at which point it is given to the vendor. If a house does not close because of the purchaser's failure to comply with the terms set out in the offer, the purchaser forgoes the deposit, and it is given to the vendor as compensation for the breaking of the contract (the offer).

    Equity:
    The difference between the market value of the property and any outstanding mortgages registered against the property. This difference belongs to the owner of that property.

    First Mortgage
    A debt registered against a property that has first call on that property.

    Fixed-Rate Mortgage:
    A mortgage for which the interest is set for the term of the mortgage.

    Gross Debt Service (GDS.) Ratio:
    It is one of the mathematical calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and this sum is then divided by the gross income of the applicants. Ratios up to 32 % are acceptable.

    Guarantor:
    A person with an established credit rating and sufficient earnings who guarantees to repay the loan for the borrower if the borrower does not.

    Hi-Ratio Mortgage:
    A mortgage that exceeds 75% of the purchase price or appraised value of the property. This type of mortgage must be insured. To avoid the cost of the insurance, a 1'st mortgage up to 75% is arranged and a 2'nd mortgage for the balance (up to 90% of the purchase price). Please contact me for further clarification.

    Home Equity Line of Credit:
    A personal line of credit secured against the borrower's property. Generally, up to 75% of the purchase price or appraised value of the property is allowed to be borrowed with this product.
    Interest Adjustment Date (IAD):
    The date on which the mortgage term will begin. This date is usually the first day of the month following the closing. The interests cost for those days from the closing date to the first of the next month are usually paid at closing. That is why it is always better to close your deal towards the end of the month.

    Interest-Only Mortgage:
    A mortgage on which only the monthly interest cost is paid each month. The full principal remains outstanding. The payment is lower than an amortized mortgage since once is not paying any principal.
    Mortgage:
    A mortgage is a loan that uses a piece of real estate as a security. Once that loan is paid-off, the lender provides a discharge for that mortgage.

    Mortgagee:
    The financial institution or person (lender) who is lending the money using a mortgage.

    Mortgagor:
    The person who borrows the money using a mortgage.

    Open Mortgage:
    A mortgage that can be repaid at any time during the term without any penalty. For this convenience, the interest rate is between 0.75-1.00% higher than a closed mortgage. A good option if you are planning to sell your property or pay-off the mortgage entirely.

    P.I.T.:
    Principal, interest, and property tax due on a mortgage. If your down payment is greater than 25% of the purchase price or appraised value, the lender will allow you to make your own property tax payments.

    Portable Mortgage:
    An existing mortgage that can be transferred to a new property. One would want to port their mortgage in order to avoid any penalties, or if the interest rate is much lower than the current rates.

    Prime:
    The lowest rate a financial institution charges its best customers.
    Prepayment Penalty:
    A fee charged a borrower by the lender when the borrower prepays all or part of a mortgage over and above the amount agreed upon. Although there is no law as to how a lender can charge you the penalty, a usual charge is the greater of the Interest Rate Differential (IRD) or 3 months interest.

    Principal:
    The original amount of a loan, before interest.

    Rate Commitment:
    The number of days the lender will guarantee the mortgage rate on a mortgage approval. This can vary from lender to lender anywhere from 30 to 120 days. We can get you rate commitment from the lenders up to 120 days.

    Renewal:
    When the mortgage term has concluded, your mortgage is up for renewal. It is open at this time for prepayment in part or in full, then renew with same lender or transfer to another lender at no cost. It is a good time to shop around for your mortgage at the renewal time to get the best possible rate. We can provide this service without any costs. Please contact us for further details.

    Second Mortgage:
    A debt registered against a property that is secured by a second charge on the property.

    Switch:
    To transfer an existing mortgage from one financial institution to another. We can have this arranged for you at no cost to you.

    Term:
    The period of time the financing agreement covers. The terms available are: 6 month, 1,2,3,4,5,6,7,10 year terms, and the interest rates will be fixed for whatever term once chooses.

    Total Debt Service (TDS) Ratio:
    It is the other mathematical calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and any other monthly obligations (i.e. personal loans, car payments, lines of credit, credit card debts, other mortgages, etc.), and this sum is then divided by the gross income of the applicants. Ratios up to 40 % are acceptable.

    Variable-Rate Mortgage:
    A mortgage for which the interest rate fluctuates based on changes in prime. However, there are various types of variable products are in the market and every bank promotes its own variable product. It is very difficult for a layperson to decide which variable product is best suited for him or which one offers the best value. It is advised to talk to a professional to work the numbers for you for various types of variable products.

    Vendor Take Back (VTB) mortgage:
    A mortgage provided by the vendor (seller) to the buyer.

    In my next article I will write about credit.

    Thanks & Regards

    Pramod Chopra
    The Mortgage Alliance Company of Canada
    Email :
    Website : http://www.pramodchopra.com" rel="nofollow">LINK
    Phone : 416-560-6951 24 hour Toll Free Pager : 1-877-366-3487 


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