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so are you looking to get a mortgage but all these different terms that people are throwing out there are just straight up complicated but they don't have to be that's why i made today's video to show you exactly what these terms mean and how they pertain to your mortgage [Music] thanks again for tuning in guys it's tom here from off mortgages as always please feel free to like the video down below as well as subscribe to the channel and hit that bell icon so you don't miss videos like this in the future so if you're anything like me when i was getting my first mortgage when all these bank reps and mortgage brokers are throwing out these terms like ltv amortization or mortgage insurance all these words are confusing the heck out of you well you're not alone i2 was once there as well and i know how frustrating it can be to not understand what these words mean well this video is going to break down all the general terms that you need to know when it comes to getting a mortgage so i promise you by the end of this video you will have learned something new and you will understand all the mortgage basics okay so let's first start off by explaining what a mortgage is so to put it in its most basic form a mortgage is simply a loan to purchase a home and the reason why people get a mortgage is because they simply don't have hundreds of thousands of dollars laying around to purchase that home so to determine the mortgage amount you simply take the purchase price and subtract the down payment which will result in the mortgage amount okay so now let's move on to amortization amortization simply means the amount of time it takes you to pay off your mortgage now as a first time home buyer if you're purchasing your first home that amortization is likely going to be 25 years or a 30-year amortization now if you have less than a 20 percent down payment you are forced to either take a 25-year amortization or less you cannot stretch that amortization any further than a 25-year amortization now if you have 20 percent down or more then you can go with the third year amortization there's many pros and cons when it comes to a 25 versus a 30-year amortization however i'm not going to go into too much detail about this that's for a later video okay so now that we have amortization figured out let's move on to term your mortgage term can be thought of as simply securing a contract with the lender so for example if you lock into a five-year term you are set at whatever interest rate you lock into whether you go with a fixed versus a variable rate that will all be dealt with and set at the time of signing for that term and in that term you're going to have many different components that were set up with your mortgage broker or the bank rep and they include things such as your interest rate prepayment privileges and how your penalty is going to be calculated now a term can be anywhere from six months to ten years now a five year term is the most common term that people go with however that's not saying that it should be the term that you go with whoever you're working with whether it's a mortgage broker or a bank rep you should be asking them what the best term is for you now moving on to loan to value an easy way to understand what loan to value means is it's a way to compare your mortgage loan amount to the value of your home so for example if you're purchasing a home with 20 down that means you're borrowing 80 of the value of the home which means that your loan to value ratio is 80 and the ltv loan to value is something lenders always look at and it's one of the deciding factors on whether you're going to be paying mortgage insurance or whether you're going to be getting a certain interest rate and one important thing to note with ltv is anything above eighty percent means that you're going to require mortgage insurance okay so now you're asking tom what is mortgage insurance mortgage insurance is required anytime you put less than 20 down on a purchase and mortgage insurance is a requirement by the lender because anytime you're putting less than 20 down it's more of a risk to that lender because if you were to default on your mortgage payments then they need to sell that house and if there's less money tied up in that house then they may not get all their money back when it comes to selling the house so let's say there is someone that is defaulting on their mortgage and they have to give up that property the lender wants to make sure that they can sell that property so they have that mortgage insurance in place in case that were to ever arise but all of that is just small details that doesn't really impact you as the borrower what you need to know is anytime you put less than 20 down on a property you're going to be required to pay a premium so this premium fluctuates as you put more money down for the down payment so let's use an example of 500 000 for a purchase price that mortgage insurance premium rate starts at four percent of that purchase price and it goes down to two point eight zero percent as you get closer to the twenty percent mark so the premium paid from five percent versus the fifteen percent goes from nineteen thousand down to eleven thousand nine hundred now it's important to note that this premium isn't something that you have to pay out of pocket right up front it's actually added to your mortgage amount now this mortgage insurance premium sounds like it's probably a bad idea but in my opinion if you only have five percent down versus 20 it's better to get into the market today with that five percent versus waiting for that 20 down payment now i don't want to go into too much detail regarding this i have gone over it in a prior video so let's move on to fix versus variable rate now a fixed rate is a set rate fixed for the entire term that you sign for the fixed rate does not fluctuate during the entirety of that term a variable rate is a rate that fluctuates as the bank of canada prime rate fluctuates throughout the year the bank of canada prime rate is what determines your variable rate so quarterly throughout the year the bank of canada gets together and they determine what the benchmark rate is going to be so today recording this video currently the benchmark rate is set at 2.45 so typically when you're locking into a variable rate you'll be locking into a set discount on that variable rate so for example if the lender is offering a prime minus 1.0 percent that means your interest rate today will be 1.45 percent now it's important to note that the discount that the lender offers you and that you sign for for that term does not fluctuate at all now what fluctuates is the bank of canada benchmark rate so that benchmark rate set today at 2.45 percent let's say the bank of canada gets together next quarter and they determine that the benchmark rate is going to rise a quarter percent that means it's going to be going up to 2.7 which means your interest rate right now is gonna go up a quarter percent as well with the variable rate a lot of lenders will actually let you lock into a fixed rate during that term as well so if you think that there's a big rise in interest rates coming in the next year well you can lock into whatever the current fixed rate that that lender is offering at the time now lots of people do shy away from a variable rate there are a lot of important factors when it comes to choosing variable versus fixed one of the most important factors to consider is the penalty a mortgage penalty is simply a penalty that is issued to you if you ever break your mortgage prior to the renewal date so let's say your renewal date is coming up in two years from now which is the end of your term well if you break your mortgage today you're most likely going to be incurring a mortgage penalty now that penalty is determined by what you signed at the start of your term so if you went with the fixed rate your penalty is most likely going to be significantly higher versus a variable rate now i'll leave it at that i don't want to go into too much detail regarding the mortgage penalties because i do have another video going into this in more detail principal versus interest the principal is simply the amount that you're paying towards your mortgage and the interest is simply the cost of borrowing now the interest rate was originally set and determined when you signed the term of the mortgage so that 2.34 whatever you signed up for at the beginning of your term is the amount of interest you're paying on the mortgage loan let's say you had an interest rate of 2.5 that 2.5 is the cost of borrowing on the mortgage loan amount equity to put it in its simplest form equity is the amount of home that you own the more principal you pay down the more equity you build up in your home so let's say your home is worth five hundred thousand dollars and your mortgage amount today is four hundred thousand that means you have a hundred thousand dollars in equity open versus closed mortgage an open term mortgage means that you can pay off your mortgage at any time you want you're not going to incur a prepayment penalty which is the benefit of an open term mortgage however your interest rate is going to be significantly higher you typically won't be going with an open term mortgage because those interest rates are very high they're more so suited for investors who are looking for a shorter term where they're flipping a house or they're doing another investment strategy where they're not holding on to that house for a very long time now with the closed mortgage like i mentioned you're not able to pay off the mortgage whenever you want you are limited to how much you can pre-pay that mortgage that's why it's important to consult a professional who knows the differences of lenders where they some lenders will have a lower prepayment amount versus the other lender having a higher prepayment amount you always want to have options when it comes to paying down your mortgage as fast as possible so that's everything you need to know when it comes to the basics of a mortgage now that is all the basics you need to know however there's a lot more strategies and components to a mortgage that need to be explained to the consumer and the borrower that's why it's important to consult a professional when it comes to getting a mortgage so i hope this video helped and i'll see you guys on the next one [Music]