What Are Closing Costs?
Financial Terms Glossary for Homebuyers and Homeowners
Understanding the language of real estate and mortgages is essential for navigating the home-buying process with confidence. This glossary defines key financial terms that every buyer, seller, or homeowner should know.
A:
Adjustable-Rate Mortgage (ARM): A type of mortgage where the interest rate adjusts periodically based on a benchmark index.
Adjustment Date: The date when the interest rate for an ARM changes.
Adjustment Period: The time between interest rate changes in an ARM.
Amortization: The process of repaying a mortgage through regular payments covering both principal and interest.
Amortization Term: The total length of time, expressed in months, required to fully repay a loan. Example: A 30-year mortgage equals 360 months.
Annual Percentage Rate (APR): The annual cost of a mortgage, expressed as a percentage, including interest, mortgage insurance, and loan fees.
Appreciation: The increase in a property’s value due to market conditions or other factors. Opposite of depreciation.
Asset: Any item of monetary value owned by an individual, such as property, savings, or investments.
Assignment: The transfer of a mortgage from one party to another.
Assumable Mortgage: A mortgage that can be transferred from the seller to the buyer during a property sale.
B:
Balance Sheet: A financial document that lists an individual’s assets, liabilities, and net worth as of a specific date.
Balloon Mortgage: A mortgage with smaller regular payments that leaves a large final payment (balloon payment) due at the end of the term.
Balloon Payment: The final large payment due at the end of a balloon mortgage term.
Basis Point: One one-hundredth of a percentage point, commonly used in finance. Example: 50 basis points = 0.5%.
Binder: A preliminary agreement secured by a deposit to purchase real estate.
Biweekly Payment Mortgage: A mortgage where payments are made every two weeks, reducing the overall interest paid and shortening the loan term.
Blanket Mortgage: A mortgage that covers multiple properties, often used for large developments or projects.
Breach: A violation of a legal agreement or obligation.
Bridge Loan: A short-term loan used to purchase a new property while waiting for the sale of an existing property.
C:
Call Option: A provision in a mortgage allowing the lender to demand repayment in full at a specified time.
Cap: A limit on how much the interest rate or payments on an ARM can increase or decrease.
Capital Improvement: A major upgrade or addition to a property that increases its value and longevity.
Cash-Out Refinance: Refinancing a mortgage for more than the current balance and taking the difference as cash.
Certificate of Deposit (CD): A financial product with a fixed interest rate and maturity date, often used as a low-risk investment.
Certificate of Eligibility: A document certifying a veteran’s eligibility for a VA (Veterans Affairs) loan.
Certificate of Title: A legal statement that confirms ownership of a property.
Chain of Title: A record of all previous owners and transactions related to a property.
Clear Title: A title free of liens, disputes, or legal questions.
Closing: The final step in a property sale where ownership transfers to the buyer, and all financial obligations are settled. Also called “settlement.”
Closing Costs: Fees and charges required to complete a real estate transaction, including taxes, legal fees, and title insurance.
Closing Statement: A detailed document summarizing the costs and payments associated with a property purchase.
Cloud on Title: Any issue or claim that might affect the property’s ownership, requiring resolution before sale.
Collateral: Property or assets pledged as security for a loan.
Collection: The process used by lenders to recover payments on a delinquent mortgage. If necessary, this includes filing notices to begin foreclosure proceedings.
Combination Loan: A financing option where buyers take out two mortgages simultaneously—typically an 80% first mortgage and a 10-20% second mortgage. These loans can help avoid private mortgage insurance (PMI).
Combined Loan-to-Value (CLTV): The total of all outstanding mortgage balances on a property, divided by the property’s appraised value.
Co-Maker: An individual who signs a loan with the borrower and shares responsibility for repayment.
Commission: A fee, usually a percentage of the property’s sale price, paid to real estate brokers or agents for facilitating a transaction.
Commitment Letter: A formal document from a lender that outlines the terms and conditions of a loan offer, also called a loan commitment.
Common Areas: Shared spaces in a property, such as hallways, recreational facilities, or parking lots, maintained by a homeowners' association (HOA) or condominium.
Community Home Improvement Mortgage Loan: A financing option allowing low-to-moderate-income buyers to borrow up to 95% of a home’s purchase price and include repair costs in the loan.
Community Property: In certain jurisdictions, property acquired during a marriage is jointly owned unless specified otherwise.
Comparables (Comps): Properties similar in size, location, and features that have recently sold, used by appraisers to determine a property’s market value.
Compound Interest: Interest calculated on the initial principal and also on the accumulated interest from previous periods.
Condominium Conversion: The legal process of changing a rental property into condominium ownership.
Conforming Loan: A mortgage that meets specific limits and criteria set by Fannie Mae and Freddie Mac, updated annually.
Construction Loan: A short-term loan used to finance the building of a property, disbursed to the builder as work progresses.
Consumer Reporting Agency: An organization that collects and provides credit history information to lenders, also known as a credit bureau.
Contingency: A condition in a real estate contract that must be met for the contract to become legally binding, such as a satisfactory home inspection.
Conventional Mortgage: A loan not backed or insured by government agencies like the FHA or VA.
Convertibility Clause: A provision in some adjustable-rate mortgages (ARMs) that allows the borrower to switch to a fixed-rate mortgage under certain conditions.
Convertible ARM: An adjustable-rate mortgage that can be converted to a fixed-rate loan, often for a fee.
Cooperative (Co-Op): A form of homeownership where residents own shares in a corporation that owns the property, giving them the right to occupy a specific unit.
Corporate Relocation: A program in which an employer assists an employee in relocating to a new area, often covering related costs.
Cost of Funds Index (COFI): An index representing the average cost of savings for banks in the Federal Home Loan Bank of San Francisco’s 11th District, used to adjust ARM rates.
Covenant: A legally binding clause in a mortgage that requires or restricts certain actions, with violations potentially leading to foreclosure.
Credit Repository: An organization that collects, updates, and stores credit information, which lenders use to evaluate creditworthiness.
E:
Earnest Money Deposit: A deposit made by a buyer to demonstrate their commitment to purchasing a property, often applied toward the down payment.
Easement: A legal right for someone other than the property owner to use a portion of the property for a specific purpose, such as access or utilities.
Effective Age: An appraiser’s estimate of a building’s condition, which may differ from its actual age.
Effective Gross Income: Total annual income, including overtime and secondary sources, that can be used to qualify for a loan.
Electronic Funds Transfer (EFT): A secure, efficient method of transferring funds electronically between accounts.
Encumbrance: Any claim or restriction on a property, such as a mortgage, lien, or easement, that may affect its transferability.
Endorser: Someone who signs a financial document to transfer rights or ownership, differing from a co-maker who shares loan responsibility.
Equal Credit Opportunity Act (ECOA): A federal law prohibiting discrimination in lending based on race, gender, age, marital status, or other protected factors.
Equity: The portion of a property’s value that the owner owns outright, calculated as the property’s market value minus outstanding mortgage debt.
Estate: An individual’s total ownership interest in real and personal property, often referenced in wills or probate.
Eviction: The legal process of removing a tenant from a property for failure to meet lease obligations.
Examination of Title: A detailed review of a property’s title history to confirm ownership and identify any potential issues.
F:
Fair Market Value:
The fair market value is the price at which a property would sell in an open market between a willing buyer and a willing seller, with neither being under any compulsion to buy or sell. It reflects the most probable price a property would fetch in a typical transaction, factoring in the current market conditions.
Fee Simple:
The most complete form of property ownership in Canada, fee simple grants the owner full control over the property, including the ability to sell, lease, or transfer it, subject only to local zoning and municipal regulations.
Finder's Fee:
A fee paid to a mortgage broker or agent who helps secure a loan for a borrower. It is typically a percentage of the loan amount or a flat fee, depending on the agreement between the broker and the borrower.
Fixed-Rate Mortgage (FRM):
A fixed-rate mortgage in Canada locks in your interest rate for the entire term of the loan, providing consistent monthly payments and protection against fluctuating market rates.
Fixed Second Mortgage:
Also known as a home equity loan, this is a second mortgage secured against the value of your home. It typically carries a fixed interest rate and is often used for large expenses like renovations or debt consolidation.
Flood Insurance:
Flood insurance in Canada is not always included in standard home insurance policies. Homeowners in flood-prone areas may need to purchase separate flood insurance to protect against property damage caused by flooding. This is especially common in places like Ontario.
Foreclosure:
In Canada, foreclosure is the legal process by which a lender takes possession of a property after the borrower defaults on their mortgage payments. Depending on the type of agreement, this can be done through a court proceeding or through a process called power of sale, which is more common in Ontario.
Fully Amortized ARM:
A fully amortized adjustable-rate mortgage (ARM) in Canada is a type of loan where monthly payments are sufficient to pay off both the interest and principal, fully amortizing the loan over the agreed term. The interest rate on this type of mortgage adjusts periodically based on market conditions.
G:
Good Faith Estimate:
In Canada, the equivalent of a good faith estimate is the mortgage pre-approval or disclosure statement. It outlines the expected costs and terms of a mortgage, including the interest rate, fees, and any other costs that may arise during the loan process.
H:
Hazard Insurance:
In Canada, hazard insurance is a type of coverage included in most homeowner's insurance policies that protects against loss caused by risks such as fire, vandalism, or natural disasters. Lenders typically require hazard insurance as part of the mortgage agreement to protect the property.
Home Equity Line of Credit (HELOC):
A HELOC in Canada is a revolving line of credit secured by the equity in your home. It functions similarly to a credit card, allowing you to borrow, repay, and borrow again up to your credit limit. It is often used for home improvements, emergency expenses, or debt consolidation.
Home Equity Loan:
A home equity loan in Canada is a second mortgage where the borrower takes out a loan secured by the equity in their home. The loan is typically repaid in fixed installments over a set term, and it is often used for major expenses such as renovations or education.
Housing Ratio:
The housing ratio, also known as the front-end ratio, is the portion of your gross monthly income that goes toward your monthly housing expenses (such as mortgage payments, property taxes, and insurance). It helps lenders determine how much you can afford to borrow.
I:
Interest-Only Loan Option:
An interest-only loan in Canada allows borrowers to make payments only on the interest for a set period, which can lower monthly payments. However, the principal balance remains unchanged during the interest-only period, which can result in higher payments later on.
Index:
An index in Canada is a benchmark interest rate used to determine the adjustments in an adjustable-rate mortgage (ARM). Some common indices include the Bank of Canada prime rate or 5-year Canada bond yield.
Impound Account:
An impound account, or escrow account , in Canada is a type of account used by lenders to collect and hold funds for property taxes and insurance premiums. The borrower’s monthly mortgage payment will include an additional amount to cover these costs, which the lender pays directly on the borrower’s behalf.
J:
Jumbo Mortgage:
In Canada, a jumbo mortgage refers to a loan that exceeds the maximum limits set by government-backed mortgage insurance programs such as CMHC. These loans typically carry stricter eligibility requirements and higher interest rates due to the larger loan amount.
L:
Lien:
An encumbrance or legal claim placed on a property as collateral for a debt or obligation. A lien can be voluntary (such as a mortgage) or involuntary (such as for unpaid taxes). It gives the creditor a right to take ownership of the property if the debt is not paid.
Lender:
The financial institution, bank, mortgage broker, or lender offering the loan to the borrower. In Canada, this may include chartered banks, credit unions, or other financial institutions.
Lifetime Cap:
In an Adjustable-Rate Mortgage (ARM), a lifetime cap sets the highest interest rate that the mortgage can reach during the life of the loan. This cap provides a limit to how much the interest rate can increase over time.
Loan-to-Value Ratio (LTV):
The LTV ratio is the percentage of the property’s value that is financed through a mortgage. It is calculated by dividing the mortgage amount by the appraised value of the property. A lower LTV typically results in more favorable loan terms, including lower interest rates, in Canada.
Lock Period:
The lock period is the amount of time a lender guarantees the interest rate on a mortgage, typically between 30 and 60 days. If rates rise during this period, the borrower benefits from the locked rate. If rates fall, the borrower typically doesn’t benefit unless a "float-down" option is available.
Lock-in:
A written agreement between a borrower and lender that guarantees a specified interest rate for a set period, usually when the borrower is under contract for a property purchase. The lock-in ensures the rate is secured, provided the loan closes within the agreed time frame.
M:
Margin:
In the context of an Adjustable-Rate Mortgage (ARM), the margin is the fixed percentage added to the index rate to determine the interest rate charged to the borrower. The margin typically remains the same throughout the life of the mortgage.
Maturity Date:
The maturity date is the day the remaining balance of a mortgage or loan is due in full. On this date, the borrower must repay the principal balance unless refinancing or renegotiating the mortgage terms is arranged beforehand.
Mortgage:
A legal agreement that allows a lender to take possession of a property if the borrower defaults on the loan. The borrower agrees to repay the loan, which is secured by the property.
Mortgage Disability Insurance:
A type of insurance policy that pays the borrower's mortgage payments if they become disabled and unable to work. This coverage helps ensure the borrower does not fall behind on their mortgage due to illness or injury.
Mortgage Insurance (MI):
Mortgage insurance protects the lender in case the borrower defaults on the loan. In Canada, CMHC insurance is required for homebuyers with a down payment of less than 20% of the property's purchase price.
Mortgagee:
The lender or financial institution who holds the mortgage on a property and is entitled to collect mortgage payments. The mortgagee can also take legal action if the borrower defaults.
Mortgagor:
The borrower who agrees to repay the mortgage loan and pledges the property as collateral. The mortgagor is responsible for making the required payments as outlined in the mortgage agreement.
N:
Negative Amortization:
Negative amortization occurs when the payments made on a mortgage are less than the interest accruing on the loan, resulting in the loan balance increasing instead of decreasing. This is most common with certain types of interest-only loans or ARMs.
Non-Conforming Loan:
Also known as a jumbo loan, this type of mortgage does not meet the eligibility requirements for government-backed programs like CMHC. Non-conforming loans may have higher interest rates and stricter conditions, often due to larger loan amounts.
O:
Origination Fee:
A fee charged by a lender for processing a new mortgage application. Typically expressed as a percentage of the loan amount, the origination fee covers costs related to underwriting and paperwork.
Owner Financing:
Owner financing is when the property seller provides direct financing to the buyer, either partially or fully, without involving a traditional lender. The buyer makes payments to the seller over time based on agreed terms.
P:
Periodic Cap:
A periodic cap limits how much the interest rate on an Adjustable-Rate Mortgage (ARM) can increase or decrease during each adjustment period. It ensures the rate does not fluctuate too drastically over short intervals.
PITI (Principal, Interest, Taxes, and Insurance):
PITI represents the total monthly payment on a mortgage, which includes four components: principal repayment, interest charges, property taxes, and homeowner’s insurance.
Planned Unit Developments (PUD):
A type of real estate development that typically includes individually owned homes in a shared community. PUDs often have shared amenities such as parks, pools, or walking paths, with some land owned in common by the residents.
Points:
Points are upfront fees charged by lenders at closing, usually one point equals 1% of the loan amount. Paying points can lower the interest rate on a mortgage, though they increase the cost at closing.
Prepaids:
Prepaids are expenses, such as property taxes, insurance premiums, and rent, that are paid in advance of their due dates and are typically prorated when a property is sold.
Prepayment Penalty:
A fee charged by a lender if the borrower repays the mortgage loan early, either by making extra payments or paying off the entire balance ahead of schedule. Some mortgage products in Canada have prepayment penalties, but they are regulated to ensure they are not excessive.
Principal:
In the context of a mortgage, the principal refers to the original amount borrowed, excluding interest. When making mortgage payments, the principal portion reduces the loan balance.
Private Mortgage Insurance (PMI):
PMI is required in Canada if the loan-to-value (LTV) ratio exceeds 80%, meaning the borrower has a down payment of less than 20%. This insurance protects the lender in case of default but is not typically required with CMHC insurance.
Q:
Qualifying Ratios:
Qualifying ratios in Canada are used by lenders to assess a borrower's ability to repay a mortgage. These include the Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio, which compare the borrower’s income to their housing costs and total monthly debt obligations.
R:
Rate:
The rate is the percentage charged by a lender for borrowing money, expressed annually. It is a key factor in determining the cost of a mortgage, impacting the monthly payment amount and the total cost of the loan.
Rate Cap:
A rate cap is a limit placed on how much an interest rate can change on an adjustable-rate mortgage (ARM), either at each adjustment period or over the life of the loan. It protects borrowers from extreme rate fluctuations.
Rate Lock-In:
A rate lock-in is a written agreement that ensures the borrower will receive a specific interest rate for a set period, typically 30, 45, or 60 days. This guarantees the rate will not change during the lock period, even if market rates fluctuate.
Rebate:
A rebate is a refund or credit from a lender, often used to offset closing costs. Loans with rebates typically have higher interest rates, as the lender recoups the cost through increased payments over the life of the loan.
Refinancing:
Refinancing involves replacing an existing mortgage with a new loan, often to take advantage of lower interest rates, reduce monthly payments, or access home equity. Refinancing in Canada can include both fixed-rate and adjustable-rate options.
Residential Mortgage Credit Report (RMCR):
A report prepared by credit bureaus for the lender, providing a summary of the borrower's credit history and financial background. It is used to assess the borrower's creditworthiness before approving a mortgage loan.
S:
Seller Takeback (STB):
A seller Takeback occurs when the seller of a property provides direct financing to the buyer, often in combination with a mortgage. The seller may hold a second mortgage or offer part of the financing for the buyer to complete the purchase.
Settlement:
In real estate, settlement refers to the process of closing the transaction, where the buyer and seller complete the transfer of ownership, and the buyer takes possession of the property.
Settlement Account:
An account managed by a mortgage servicer where a borrower’s escrow payments, such as for property taxes and insurance, are held and disbursed when payments are due.
Settlement Analysis:
A review of a borrower’s settlement account to ensure that the funds being held are adequate to cover property expenses like taxes and insurance. This helps prevent any shortfalls that could delay payments.
Settlement Collections:
Funds collected by a mortgage servicer to cover property expenses like taxes, insurance, and mortgage insurance, and held in an escrow or settlement account until due.
Settlement Disbursements:
The distribution of funds from a settlement account to cover various property-related expenses such as property taxes, insurance premiums, and mortgage insurance.
Settlement Payment:
The portion of a borrower’s monthly mortgage payment that is placed into an escrow or settlement account to cover costs like property taxes and insurance.
Simple Interest:
Interest calculated only on the original principal amount, without considering any previously earned interest. This is common with certain types of loans or savings accounts.
Stated/Documented Income:
Some loans require the borrower to "state" their income, providing no supporting documentation, while others require full documentation, such as tax returns or payslips, to verify income.
Subordination:
Subordination occurs when a second mortgage or home equity loan is moved to a lower priority position after refinancing the primary mortgage, meaning the original lender’s claim takes precedence over the second.
Survey:
A detailed map or drawing showing the boundaries of a property, along with its improvements, such as buildings, fences, and roads.
T:
Tenants in Common:
A form of joint property ownership where two or more individuals share ownership of a property, but their shares may not be equal. Upon death, the deceased person's share is passed on to their heirs, rather than to other owners.
Title Insurance:
Insurance that protects the buyer and lender against defects in the title of a property, such as liens or ownership disputes, that may arise after the property purchase.
Title Search:
An investigation conducted by a title company to confirm the legal ownership of a property and ensure there are no issues with the property’s title, such as unpaid liens or claims.
Total Debt Ratio:
This ratio compares a borrower’s total monthly debt obligations, including the mortgage payment and other debt, to their gross monthly income. It helps lenders assess the borrower’s overall financial health and repayment ability.
V:
Variable Rate:
An interest rate that may fluctuate over time, typically in response to changes in an underlying index. It contrasts with a fixed-rate loan, where the interest rate remains constant throughout the term.
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