Mortgaging Your Future

Last week, I discussed the fun and exciting experience that is applying for a mortgage. For those of you who have survived that process and are now looking at the daunting experience of negotiating the terms, I present this handy mortgage glossary:

Amortization Period: The time over which equal payments will pay off your mortgage — in some countries this can be as many as 150 years. Every bank calculates the payments differently, rendering those “How much can I afford?” calculators on their web sites pretty much useless.

Appraisal Value: An estimate of the market value of the property. When measured by the bank, the appraisal value will be less than what you need it to be to avoid having to buy mortgage insurance. When measured by the tax authority, the appraisal value will be more than you want it to be so your property tax bill will go up.

Closed Mortgage: A mortgage that cannot be prepaid, renegotiated or refinanced before maturity, because the last thing a bank wants you to do is pay off your loans.

Foreclosure: A legal procedure whereby the lender eventually obtains ownership of the property after the borrower has defaulted on payments. It is called this because decisions about properties are typically made by bankers while on the golf course:

“What shall we do about the Henneman property, Boss?”

“Fore! [Whack!] Closure.”

Fixed Rate: You agree to pay the bank a fixed amount of interest on the mortgage. Example: You agree, in writing, to pay the bank 8.9% for the next ten years. The next day, the posted rate will drop to 4.3%.

Home Equity: The difference between the market value of the house and the total debts registered against it. This is an entirely theoretical figure because the only way to get the equity out of your house as actual useful cash is to sell it and be, well, homeless.

Maturity Date: Last day of the term of the mortgage agreement. It is called this because when your mortgage is finally paid off in full, you tend to do things like leaping on to the couch and bouncing all over the place, thus losing your maturity.

Mortgage Broker: This is an independent person who can call up the headquarters of your local bank and get a better set of terms than the actual mortgage manager of your local bank. No one seems to know why bank headquarters still pay mortgage managers. [Sidebar: Please note the root word of broker is: broke.]

Mortgage Term: The number of years or months over which you pay a specified interest rate. See also Jail Term.

Open Mortgage: A mortgage which can be prepaid at any time, without penalty. Usually only available on a mortgage where the interest rate was so low that the bank wasn't making any money anyway.

Penalty: What the bank hits you with if you make an early attempt to make good on your promise to pay them back.

P.I.T.: Principal, interest and taxes. Also what you dig yourself into when you get a large mortgage.

Total Debt Service (TDS) Ratio: This is the percentage of gross income needed to cover monthly payments for housing and all other debts. The total should generally not exceed 37% of gross monthly income, unless you're a large corporation like Enron, in which case the bank is happy to let your debt exceed 537% of your gross annual income.

Variable Rate Mortgage: A mortgage for which the rate of interest may change. Typically, you take a variable rate mortgage because all the economists agree that rates are likely to stay low or go lower over the next five years. Approximately three minutes after the ink dries on your mortgage agreement, interest rates will spike to a twenty-year high.

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