Get familiar with a few of the key terms used when learning about mortgages.
Mortgage is a loan that is used to purchase a home, or other type of property. It allows the lender to take ownership of the property if you fail to repay the loan based on the agreed terms. A mortgage is usually a large loan that is paid off over years. This makes you the mortgagor, while the lender is the mortgagee.
When you take a mortgage, you are responsible to making regular, on time payments to the lender. The payments cover the interest as well as the principal of the loan (balance). Your payments may include property taxes, insurance or other similar charges.
When you make a payment, it covers the interest first, then the remainder goes to the principal balance. In the beginning only a small amount goes towards the principal but over years of paying, more money goes towards the principal until it is paid in full.
Equity in the property is the part of the property that has been paid for. Through a down payment, and your monthly mortgage payments.
If you want to purchase a home with a mortgage, you need to save up for a down payment. This down payment is how much you pay up front for your home and the mortgage covers the rest. In Canada, the minimum is 5% but some lenders may require a higher down payment.
Mortgage term is the length of time in years that the agreement and rate is in effect. You do not need to fully pay off the mortgage at the end of the agreed term, you can renew it, renegotiate the rate and extend to another term.
The amortization period is the time period that it would take for you to pay off the mortgage balance in full, based on the payments you are making at the interest rate you agreed upon.
Having an open mortgage allows you to make extra payments at any time. This way you are able to put any extra money you can into your mortgage. You may even be able to pay off the entire loan before the end of your term this way. Although the interest rates on open mortgages is usually higher than on a closed.
If you have a closed mortgage and want to change your agreement (change to a lower interest rate) you usually have to pay a prepayment charge. Sometimes the lender will allow you to make extra payments(prepayment) but with limitations.
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