As a first-time homebuyer, all of the terms your lending institution and real estate professional are throwing around may be completely confusing to you. This article will break down some of the most common definitions that you hear regarding mortgages.

What is a mortgage?

If you can’t afford to pay for the entire cost of your house, you will most likely apply for a mortgage. A mortgage is a loan afforded to you by a lending institution for the remainder of the cost of your house (after your down payment is deducted). You will agree to certain conditions and agree to pay the mortgage off within a specified time period.

What is an amortization period?

This leads me to the next definition: amortization period. This refers to the time period with which it will take you to completely pay off the mortgage. On most mortgages you’ll pay interest along with the principal, so this period of time includes paying both amounts. The longer your amortization period, the more interest you will pay.

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What is a mortgage term?

Many people confuse the amortization period with the mortgage term. The term is the length of time you are committed to that particular lender. For example, many lenders will stipulate a five-year agreement. After this time, you will be able to switch lenders without penalty. You’ll still have to pay your loan until the end of the amortization period (or before if you are making extra payments), but you’ll be able to switch to different terms or another lender once your mortgage term is up.

What is payment frequency?

Your payment frequency will determine how much you pay each time. Many people choose to have monthly mortgage payments, but in this situation, you will pay more interest, as it accumulates over the month. Others choose semi-monthly, because this is how they get paid. Making two payments a month will reduce your overall interest paid. The best frequency of payment is to do weekly or bi-weekly payments, as you’ll pay the least amount of interest using this method.

What is the difference between open and closed mortgages?

There are two different types of mortgages: open and closed. What you choose will depend on your particular situation and what sort of agreement you’ll want to have with your lending institution. An open mortgage allows you to repay portions or all of the principal at any time without penalty. On the flipside, a closed mortgage is one where you aren’t allowed to make extra payments or pay off the mortgage without a penalty.

What is mortgage insurance?

If you aren’t putting 25% down on your home, you will require mortgage insurance and this will likely be through CMHC or GE. Mortgage insurance ensures that if you default on your mortgage, the lender will still get paid. It is calculated by what percentage you’ve put down as a down payment, with a smaller payment having a heftier price tag. The amount of the insurance is added right to your mortgage principal, so you’ll also pay interest on it over the time of your mortgage.