Understanding Terms Used by Mortgage Lenders

The key to negotiating the best mortgage deal lies in understanding the terms used by mortgage lenders. Unless you learn to speak their language, you will find the entire process of loan application quite perplexing. Here is a brief note on each of the terms that are frequently used by a mortgage lender.

Monthly payment

As straightforward as it sounds, a monthly payment refers to the amount you have to pay every month towards clearing your outstanding loan. A monthly payment stays the same in a fixed-rate loan, whereas in a variable-rate loan, it can be adjusted to a higher or lower amount based on the interest rate.

Monthly gross income

Your monthly gross income is the total amount of money you make, without considering any deductions for tax or other liabilities. This is the amount usually considered by the lender to evaluate your loan eligibility, after removing any liabilities towards credit cards and other loans.

FHA loan

FHA stands for Federal Housing Society. An FHA loan, which is insured by the federal housing society, is one of the preferred mortgages offered by a mortgage lender.

Equity

Equity refers to the value of your property minus your outstanding mortgage balance. For example, if your property is valued at $200,000 and your outstanding mortgage balance is $50000; then your home equity will be $150,000 or 75% of the property value. Your equity changes whenever there is a change in your property value or your outstanding mortgage.
Adjustable rate mortgage
Also known as ARM, this is a type of mortgage in which the rate of interest on the outstanding mortgage amount is tied to the prime rate. Initially, the rate of interest is fixed for a certain period, after which it is reset periodically. This type of mortgage is also known as variable-rate mortgage or floating-rate mortgage.

Fixed rate loan

If you opt for a fixed rate loan, then you will be paying the same rate of interest over the end of your loan term. In the present low interest climate it is best to stick with a fixed rate mortgage.

Balloon mortgage payment

Think twice before you agree to make a balloon mortgage payment as suggested by your mortgage lender. In this case, you repay a very small portion of your principal in the beginning and make a balloon payment, which is a huge accrued amount, at the end of your loan term. This may seem attractive at first glance but is a big risk as you risk losing your property in the event of a default.

Debt to income ratio

Your debt to income ratio, that takes into account your income and all the other outstanding debt, is used to calculate your loan eligibility.

The above mentioned are just a few terms that are most commonly used by a mortgage lender. If you still find it difficult to understand any of the terms used by the lender, do not hesitate to get your queries clarified before signing the mortgage agreement.

For more information on mortgages in Canada, contact a mortgage lender at Canadian mortgages Inc