• Douglas Paterson

Mortgages 101: Ten Need-to-know Mortgage Terms

From selling a home to finding the lender with the best rates, and best terms for you, there are many considerations involved in real estate and mortgage terminology that every savvy shopper or owner needs to be aware of. Yes, just one more thing to add to your list. While there may be a few terms or acronyms you'll hear that will be unclear, here are a few you'll want to keep an ear ready for so you'll be prepared for home ownership and mortgage commitment. Here is our list of important mortgage terminology.

Adjustable-Rate Mortgage

Often referred to as ARM, an adjustable-rate mortgage is aligned to the conditions of the market. This means that your interest rate will shift from day to day along with the market, and the amount of your monthly mortgage payment will fluctuate along with it.


Fixed-Rate Mortgage

Unlike an ARM mortgage, a fixed-rate mortgage offers a predictable monthly interest rate that you can rely on, month in and month out. While this can be reassuring for many homeowners who are rate-weary, it can potentially end up costing more than an adjustable-rate mortgage by the end of the loan term.


Down Payment

Down payment is one of the most familiar mortgage terms out there, and refers to the amount of money you put down on your home to secure it. While putting 20% down will enable you to avoid having to pay private mortgage insurance, the amount that is required can vary between lenders. Also, keep in mind there are many instances where it makes sense to make a smaller down payment rather than the largest you can afford.

Mortgage Insurance

Often known as CMHC this type of insurance can often be confused with homeowner's insurance, which protects your home in the event of fires, floods and other damage. Mortgage insurance however, is a type of insurance that is required for those who do not put 20% down and is there to protect the lender in case of loan default. For homebuyers who can put down 20% or more, mortgage insurance is typically not an issue (mortgages for those new to Canada is one such exceptions to the rule).


The Principal

With various costs involved in a mortgage, such as interest, insurance, and the down payment, it can be challenging to keep all the mortgage fees and costs straight. However, the principal amount is unique as it represents only total loan (the actual amount being borrowed) to make a home purchase. When you hear the phrase "paying down the principal", it refers to the total amount you are paying to lower your loan and has nothing to do with payments toward interest accrued.


Debt Service Rations

The GDS and TDS are ‘debt service ratios’ that are used to determine whether a potential borrower can afford to pay their potential mortgage. These numbers are expressed as percentages.


GDS

Aka “Gross Debit Service” Ratio, GDS attempts to measure a borrower’s ability to make their regular mortgage payments, relative to their income. The GDS measures the PITH (see below) against monthly income.


PITH

The PITH represents the Principal, Interest, Property Taxes, and Property Heat.


‘PI’ – this is your monthly mortgage payment, consisting of both the amount paid toward the principal (P) and that which is paid to cover the monthly interest (I)

T - monthly property taxes paid on the subject property.


H – the cost to heat the home on a average monthly basis.


TDS

Like the GDS the TDS is used to determine if a borrower can afford the potential mortgage payment, but in this calculation a lender, in addition to the GDS, includes all other debts that the borrower has including credit cards, lines of credit, car loans, HELOC’s, ect….



Loan to value (LTV)

Often referred to a the “LTV”, loan to value is simply a number which represent the percent of the value of property being borrowed against the property. While other considerations may factor in, the simplest calculation is Loan Amount / Property Value (represented as a percentage). For example, if you are buying a home which is valued at $1,000,000 and you would like to borrow $600,000 from a lender, the Loan to Value (LTV) will be $600,000/$1,000,000 = 0.60 or 60%.



There are many financial terms that may not be familiar to the layman, but there are a number that will be critical to understand when you're entering the real estate market. If you are getting ready to purchase a home or get pre-qualified for a mortgage, you should consider brushing up on your terminology and connecting with a mortgage broker near you.



mortgage broker in Milton

Doug Paterson

Mortgage Agent in Ontario, Canada.

Dominion Lending Centres.

416.432.8836 | www.dougpaterson.ca


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