The terminology and various options that are now available with mortgages can sometimes seem overwhelming. See below for some explanations and definitions to help you better understand mortgages.
Mortgage Term: the term is the length of time during which a mortgagor pays a specific interest rate on the mortgage loan. The entire mortgage isn’t usually paid off at the end of the term, because the amortization period is normally longer than the term.
Amortization Period: is the length of time it would take the mortgagor to completely repay the loan. Amortization periods are usually 10 to 30 years long.
Types of Mortgages:
There are two basic types of mortgage loans which most mortgages fall under:
The Conventional Mortgage Loan: A mortgage loan up to a maximum of 80% of the lending value of the property. Mortgage insurance is not required for this type of mortgage.
The High-Ratio Mortgage Loan: A mortgage loan for more than 80% of the purchase price or appraised value of the property. These types of mortgages are contingent on the borrower paying a mortgage default insurance premium in order to protect the lender.
Open vs. Closed Mortgages
Open Mortgage: is a mortgage loan which allows the borrower to make partial or full repayment of the loan at any time with no penalty. These types of mortgages generally have shorter terms (usually ranging from six months to a year).
Closed Mortgage: have strict conditions on prepayment of principal above the agreed upon amounts throughout the term. Prepayment above what the contract specifies is prohibited and results in penalty.