Take a crash course in speaking mortgage.
Buying a home and securing a mortgage is intimidating enough, and adding a few complicated words and terms to the mix can make it even trickier.
So for home-buying novices, or for those who want a refresher, here’s a cheat sheet — a quick guide for translating some of the most common mortgage terms:
- Agreement of Purchase and Sale (APS): A legal contract that states the buyer’s desire to purchase the property — including the price they are willing to pay. A firm offer carries no stipulations. A conditional offer sets out the terms and conditions (getting a home inspection and financing, for example) the buyer and seller must agree to before the home can be sold.
- Amortization: The period of time it takes a homeowner to pay off a mortgage.
- Annual percentage rate (APR): An annual interest rate that is charged for borrowing funds, including fees that the customer has to pay, expressed as a percentage. Banks and other lenders must by law disclose their rate so that borrowers can compare offerings from mortgage competitors in Canada.
- Appraisal: An evaluation of a property’s current market value, provided by a trained, accredited appraiser.
- Inspection: An assessment of the overall condition of the property, its components and structure, and a test of all systems, conducted by a qualified inspector. In a written report, the inspector identifies necessary repairs and sometimes their potential costs.
- Closing date: This is the day the buyer pays for the home, takes possession of the property and receives the Certificate of Title, a legal document that states the name of the new owner.
- Closing costs: On the closing day, additional costs, like legal fees and land transfer taxes, need to be paid. These are typically 1.5 percent to 4 percent of the property’s purchase price.
- Fixed-rate mortgage: The loan interest rate and mortgage payment amount are locked in and won’t increase for the term of the mortgage.
- Variable rate mortgage: The mortgage payment is usually locked in, but the amount of interest and principal fluctuate depending on market conditions. When the prime lending rate drops, less of the payment goes toward interest and more is applied toward the principal balance. When the prime rate increases, more of the payment is redirected to pay interest and less to the principal.
- Pre-qualification: Before you start shopping for a new home, a preliminary decision is made by the lender about how much you will be allowed to borrow. This is determined by a variety of factors, such as your credit history, employment status and assets, and is valid for a certain number of days.
- Title insurance: Insurance that helps protect the current owner and the prospective buyer against losses. These include title defects and fraud, existing liens, or encroachment from neighbouring properties — in other words, an issue that challenges the property’s ownership.
If you have questions about these terms or others not on the list, talk to a mortgage specialist. And don’t be afraid to ask — they’re there to help!