CHAPTER 13 buying a home and mortgage financing.docx

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21 Apr 2012
CHAPTER 13 buying a home and mortgage financing
Mortgage financing: traditional way of borrowing money to purchase a home
Home mortgage: real estate loan with equal monthly payments
Mortgage: transfer of an interest in property to a creditor as security for payment of a debt with a right of
redemption by the borrower upon repayment of the debt
o Right of redemption: title of ownership of the home is actually conveyed to the bank and what
you have is a right to reclaim clear title to the home upon full repayment of the debt
o Equity of redemption: right to reclaim title from the lender
o First mortgage: mortgage where the conveyance of title
o Second mortgage: the right to a further equity of redemption which can again be mortgaged
Consists of using the equity of redemption as security or collateral for a loan
o There can be successive mortgages of equities of redemption following the first mortgage and
the borrower retains at all times an equity of redemption in the last mortgage given
Basic concepts and terminology
o Principle: amount of money that is being borrowed
o Interest: price paid by the borrower to the lender for the use of the lender’s money
o Amortization: gradual retirement of a debt by means of partial payments of the principal at
regular intervals
o Amortization period: time period required to require completely a debt through scheduled
repayments of principle
o Blended payments: method of repayment of a debt where the periodic repayments are constant
and each payment includes interest and repayment of part of the principal
o Term: actual length of time for which the money is loaned at a particular rate of interest
o Maturity date: final date in the term of the mortgage
o Conventional mortgage: term used to describe a first mortgage granted by an institutional
lender where the amount of the loan does not exceed 75% of the appraised lending value of the
o High ratio mortgage: mortgage that exceeds 75% of lending value and must be insured
o Default: failure to meet the obligations imposed by the debt
o Foreclosure: remedial court action taken by a mortgagee, when default occurs on a mortgage, to
cause forfeiture of the equity of redemption of the mortgager
o Power of sale: right of a mortgagee to force a sale of the property should default occur
In Canada, mortgage rates are stated as an annual rate with semi-annual compounding but the loan is
normally repaid by monthly payments
o Compounding period (6 months) is different from repayment period (1 month)
Outstanding principle (outstanding balance): equal to the present value of the remaining stream of
payments, discounted at the equivalent monthly compounding rate
Five elements in mortgage:
1. Equivalent monthly compounding rate
2. Periodic mortgage payment
3. Outstanding balance of the principle at any point in time
4. New mortgage payment when there is a change in the rate of interest or in the amortization
Canadian financial institutions will not lend more than 75% of the appraised value of the house; to buy a
house, need a down payment of 25%
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