Mortgage Lingo - Finance And Security

Amortization: The period of time it would take, if payments were made regularly throughout the period, for the loan to be fully extinguished. The conventional mortgage amortization period is 25 years. A three-term/25-year amortization means the mortgage has a life of three years, but with payments calculated as if the debt would be fully retired (without prepayment) in 25 years.

Blended Payments: Equal payments consisting of a principal and interest component, paid each month during the term of the mortgage. The principal portion of the payment increases each month, while the interest portion decreases accordingly.

Debt-service Ratios: In deciding whether to grant a mortgage loan, institutions consider the percentage that the principal, interest and taxes represents of the combined gross incomes of the borrowers. Usually, these items should not exceed 30 percent of the borrowers' gross incomes, while those items plus other loans (such as car or personal loans) should not exceed 37 to 40 per cent of gross incomes. To calculate the gross income needed to finance a mortgage loan, combine the monthly mortgage payment (amortized over 25 years), taxes and maintenance (for condominiums) and multiply the total by 40. The debt service ratio is satisfied if the gross incomes exceed this amount.

Equity: The homeowner's interest in the property. A $100 000 home purchase financed by a $75 000 mortgage means the homeowner's equity is $25 000. With each blended payment, the homeowner's equity is increased. Only the homeowner's equity can increase or decrease if the value of the property changes.

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