When applying for a mortgage for the first time, you will definitely end up having to deal with a few terms common to the mortgage industry. If you don’t have a background in finance or commerce, understanding such terms can be difficult the first time you come across them, which means that it will be difficult for you to know what the exact terms of the mortgage are. This also applies when getting debt consolidation mortgages in Montreal for the first time. Some of the common terms that you should be familiar with by the time you start shopping for a mortgage include:
Adjustable Rate Mortgage (ARM)
When shopping for a mortgage, you may come across some that are designated as Adjustable Rate Mortgages. This term refers to a mortgage that has a fixed interest rate for only a limited amount of time, such as 1, 3 or 5 years after you apply for and get the mortgage. After this, the interest rate will change based on various factors, the most important of which is an index that the mortgage company will explain to you when signing up for it.
The rate adjustments will be done in intervals defined by the lender. This can be beneficial to you if the housing market fundamentals result in a reduction in the mortgage rates, since this means that you will end up paying progressively less over time. The mortgage will essentially cost you less than you had anticipated. However, it’s also important to remember that the rate can increase particularly in markets where the fundamentals indicate increased risk.
Annual Percentage Rate (APR)
The APR is one of the commonest terms associated with mortgages and other types of loans. It is a calculation that is used to determine the actual cost of the mortgage, i.e. the true interest rate that you will pay. The Annual Percentage Rate can either be fixed or adjustable depending on the terms of the mortgage. Each of these has its benefits and disadvantages.
Amortization refers to the schedule that will be used to service the loan. When you get a mortgage, there may be other costs added onto it including interest which you will need to pay. When all these costs are calculated and the duration of payment taken into account, one can then calculate the amount you’ll need to pay per month in order to fulfil all your obligations. On the surface, this might seem simple, but the fact that there are so many variables to consider (depending on the type of mortgage you get) means that the calculation can be complicated. You may even need it to be done by the lender to ensure accuracy.
When buying a home, you will need to pay the listed or negotiated price for the home, as well as extra charges which are usually lumped together as closing costs. These include attorney fees, recording fees and other costs. Such costs may be considered when applying for a mortgage.
The commonest way of servicing a mortgage is by making a monthly payment for the duration of the mortgage. This translates to 12 payments over the year. However, one can also choose to make the payments every two weeks instead, by negotiating for a bi-weekly mortgage. You would end up paying half the monthly costs every two weeks, but would end up making 13 payments instead of 12 in a year. This reduces the amount of time needed to pay off the loan, and also reduces the interest due.
These are just some of the common terms associated with mortgages that you need to understand. The key element to always keep in mind is making sure that any jargon you come across is explained to you as clearly as possible. The goal is to ensure that by the time you are signing the mortgage forms, you will know what to expect and understand the terms and conditions with a high degree of accuracy.