Chapter 2: Basic Mortgage Concepts Flashcards
Define Shelter to Income
(1)
Percentage of income that is used to pay shelter or housing cost
Define Average Debt to Income Ratio
(1)
Amount of debt compared to income, expressed as a percentage
Define downpayment
(1)
amount of money that a purchaser will be providing from his or her proceeds.
5% minimum down payment for insured mortgage remained for property up to $500,000
Define Loan
(1)
amount of money advanced to a borrower
Define Secured
(1)
Legal document that outlines the loan is registered on title of the property to secure the loan. If the borrower defaults on the loan, the lender has the right to exercise its interest in the security through several methods
Define collateral mortgage
(3)
- re-advancing of principal as the borrower pays down their mortgage or if their property value increases (usually a line of credit)
- won’t be able to take out a second mortgage
- High LTV 120%
Define discharging a mortgage
(1)
removing the charge from title, cancelling the lender’s security in the property
Require additional fees to be transferred or renewed to another lender.
Advantage of collateral mortgage
(1)
Refinancing: the lender does not have to discharge the current charrge (the security) and register a new one
Disadvantage of collateral mortgage
(2)
- Additional financing: will not be able to get a second mortgage
- **Switch/Transfer: **at the end of the term a transfer or switch to another lender is more costly than with a standard mortgage since the new lender will need to discharge the current mortgage and register a new one
Difference between a pre-approval and pre-qialification
(2)
**Pre-Approval: **borrower is shopping for a property. but has not yet made an offer, they can find out how much they can borrow by obtaining a pre-approval from a lender
- borrower’s income, lendr’s interest rate and amortization
- rate hold for 45- 120 days
- credit check required
**Pre-Qualification: **curious about how much they qualify for
- no credit check required
Goverment of Canada Support for Homebuyers
(5)
- **First Time Home Buyer Incentive **
- eligible to borrow 5% or 10% of purchase price
- payback same percentage when they sell or within 25 year window - **Home buyer program **
- use up to $35,000 of their RRSP as downpayment without paying tsx o the withdrawal
- repaid in 15 years - **Home buyer amount **
- **GST/HST new housing rebate **
- **Canada Greener Homes **
- improve the energy efficiency and reduce energy bill
- receie up to $5,600
Define Equity Take out
ETO (1)
borrower increase the size of their mortgsage or take out a second mortgage or another debt against the property, such as line of credit
Define bridge financing
(1)
a person is selling their current home and buying a new one
How is construction mortgage moving in stages
(5)
Provides cash in stages:
1. First Draw: 15% to pay to land, excavation, and foundation
2. Second Draw: 25% to pay for roof and watertight
3. Third Draw: 25% to pay for installation of plumbing and electrical wire with heating and drywall in place
4. Fourth Draw: 20% for installation of cabinet, bedroom, washroom ,and kitchen
5. Fifth Draw: 15% for interior and exterior in landscaping
Formula for cost to buy down rate
(1)
(current rate - new rate) x FV x term
cost the agenet to buydown a percentage
Define balloon payment
(1)
amount repayable at the end of the term
Define compound interest and what does J represent?
(1)
Rate is charged more than once per a year with the effecting of charging interest on interest. Two interest rate are said to be equivalent if, the same amount borrowed over the same period of time, the same amount is owed at the end of the period.
J: annual interest rate
Give an example with $100,000 at J2 = 6%. What is the outstanding + accrued interest?
$100,000 at J2 = 6%
$100,000 x 3% = $3,000
Accrued interest of $100,000 + $3,000 = $103,000
$103,000 x 3% = $3,090
Outstanding balance + accrued interest = $103,000 + $3,090 = $106,090
Give an exmaple with borrowed $100,000 and owes $6090, at J1. What is the percentage?
Borrowed $100,000 and owes $6,090 at J1
$100,000 x ?% = $6,090
?% = $6,090 / $100,000
?% = 6.09%
Define blended mortgage payments?
(3)
consist of interest and principal
Principal portion: repayment of principle borrowed (increase over time)
Interest portion: paid to compensate lender for the loan (decrease over time)
Name and describe six of the main borrower obligation under a mortgage contract
borrower covenant (6)
- Repay the loan
- Insure the property: protect lender from losing their security due to fire or other covered risk
- Maintain the property
- Not to commit waste
- Pay Property tax
- Follow the terms of the standard charge terms
Lender Covenant (3)
- **Discharge of charge: **proof that the amount borrower has been paid in full
- Assignment of mortgage: borrower right to assign the mortgage to a new lender
- Provide quiet possession: free from interference on possession date
Define High ratio mortgage
(3)
- mortgage that exceeds 80% LTV (80.1% or higher)
- has less than 20% down payment
- obtain mortgage default insurance provided by federal bank
Define self insured mortgage
(1)
does not use default insurance, but charges a lender fee and pool this money in a reserve fund to help offset risk associated with lending high ratio mortgage without protection
Define conventional mortgage
(2)
- mortgage is 80% LTV
- has more than 20% down payment
Difference between mortgagee and mortgagor
(2)
**Mortgagee: **the lender
Mortgagor: the borrower
Discuss the difference between a mortgage and a car loan
(2)
Mortgage is a loan secured by real property while car laon is secured by registering s loan against a car
Mortgage: Payment after (not in advance)
Car loan: Payment before (in advance)
There are two mortgages registered against the title of Barbara’s property. One was registered on May 20, 2022 and the other was registered on March 17, 2021. Which is the 1st mortgage and which is the 2nd?
Mortgage registered on March 17, 2021
Jonathan owns a house valued at $250,000 with a current 1st mortgage that has a balance of $190,000.Jonathan has credit card debts of $12,500 that he wishes to consolidate by increasing his first mortgage. Would Jonathan require a conventional or high ratio mortgage?
($190,000 + $12,500) / $250,000 = 0.81
Therefore it is a high ratio mortgage. Putting less than 20 percent down
Every mortgage comes with a set of standard charge terms. Discuss the purpose of this document and its importance in the mortgage transaction.
The Standard Charge Terms is a document that is created by the lender and contains all the terms and conditions regarding borrowing and repaying money when real property is used as collateral. It contains detailed information on the lender’s and borrower’s obligations, referred to as covenants, as well as the remedies available to the lender if the borrower does not meet these obligations
What is the difference between a collateral mortgage and standard mortgage?
A charge that is typically registered for an amount and rate higher than what is borrowed, allowing the lender to re-advance or lend additional principal when certain conditions are met without the need to discharge the current mortgage and register a new one.
What is the difference between an equity take out and a refinance?
(2)
An equity take-out (ETO) is typically a new mortgage used to access equity in the property. A refinance, while serving the same purpose, is typically the renegotiation of a current mortgage to meet that goal.
What is the differnce between a switch and a transfer?
They are the same thing; when a borrower moves their mortgage to another lender on maturity without increasing the amount borrowed.
How much is owing at the end of the amortizatino period?
zero dollars
Describe a construction loan
This is a loan to build a structure, such as a residential home, high-rise condominium, etc.
Why is a borrower required to maintain property insurance?
To ensure that the lender’s security is protected
Why must a borrower pay their property tax?
To ensure that the municipality does not register a lien against the property for unpaid taxes, which would take precedence over any other mortgages registered on title
