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Mortgage Glossary

Amortization

The number of years over which you will repay a mortgage. The most common mortgage amortization periods are between 20 years and 30 years.

Appraisal 

Prepared by a qualified real estate appraiser, an appraisal reports the estimated fair market value of a property.

Base rate

The lowest interest rate that is charged by banks in Bermuda. The base rate is used to determine other interest rates, for example, base rate + 1% for...

Bridging loan

Interim financing, which temporarily finances, for example, the funds necessary to cover completing the purchase of one property while waiting for the sale of another to complete.

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Certificate of occupancy

This certificate is issued by the local government entity responsible for the use of land in the community where the property is located. The certificate states that the buildings on the property (or any improvements made to those buildings) comply with the government's codes, ordinances, and regulations, and that these buildings may now be occupied.

Closing

The final step in the mortgage loan process after loan commitment. The closing is a meeting between all parties involved in the mortgage transaction in which mortgage documents are signed. (Also known as, settlement)

Closing costs

Fees paid at a mortgage closing. Some examples of closing costs are title insurance, attorney fees, appraisal fees, recording fees and taxes.

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Closing date

In most cases, the date when the sale of a property becomes final and the new owner takes possession.

Collateral

Property pledged as security for repayment of a mortgage loan. If the borrower defaults on the loan, this collateral would then be used to pay off the mortgage.

Conveyance

The transfer of property from one owner to another.

Credit score

A numerical rating provided on a credit report that establishes creditworthiness based upon a person's past credit and payment history and their current credit standing. The bank uses this credit score to determine the borrower's ability to repay a loan.

Debt-to-income ratio

Relationship of a borrower's monthly payment obligation on their long-term debts divided by their gross monthly income, expressed as a percentage. (Also known as bottom ratio) If this ratio is less than 40%, the borrower would most likely be able to manage loan payments.

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Default

Failure to abide by the terms of a loan agreement.

Easement

A right granted for access to a particular part of your property.

Equity

The amount by which the value of the borrower's home exceeds the amount owed on the mortgage loan. If the borrower's home is worth $500,000 and the borrower owes $325,000 on the mortgage loan secured by the borrower's home, then the borrower's equity in that home is $175,000 or 35% equity in the home.

Escrow account

An account established with a mortgage lender comprising of funds from a borrower used to pay taxes and insurance premiums when they become due. (Also known as impounds or reserves)

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First mortgage

A mortgage whose lien is superior, that is, first in line to be paid before any other mortgage on the same property. This lien is superior either because it was recorded prior to all other mortgages or because the mortgagee of another mortgage, which had been recorded ahead of this mortgage, has agreed to have the earlier lien come next in line to the lien of this mortgage.

Fixed rate of interest

A rate of interest that remains constant throughout the length of the term.

Foreclosure

A legal procedure whereby the lender obtains ownership of the property when the borrower does not follow the terms of the mortgage agreement.

Interest

The amount of money the borrower pays the lender for the use of its money. The total amount is determined by the rate of interest the bank offers its customers.

Interim interest

Interest owned by the borrower to the lender on the mortgage loan from the day of the closing to the date covered by the first payment.

LIBOR index

The London Interbank Offered Rate Index is the average yield of interbank offered rates for one-year U.S. dollar denominated deposits in the London Market, as published in The Wall Street Journal.

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Lien

An encumbrance on property, which acts as security for the payment of a debt or the performance of an obligation. A mortgage is a lien. A lender will want most, if not all, liens on the property removed before making a mortgage loan.

Loan-to-value ratio

The loan in this ratio is the mortgage amount. The value is either the purchase price of the property or its appraised value, whichever is lower. The loan-to-value ratio is the mortgage amount divided by the value of the property, expressed as a percentage.

For example, if a property is purchased for $1,100,000, appraised for $1,000,000 and the buyer is applying for a loan in the amount of $900,000, the loan-to-value is 90% (900,000 divided by 1,000,000).

A lender will use this ratio to determine the maximum mortgage loan amount that it will make on the property.

Mortgage

A pledge of real estate collateral to secure a debt. Also, the legal document describing and defining the pledge. The mortgage may also include the terms of repayment of the debt.

Mortgagee

The lender in a mortgage transaction.

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Mortgagor

The borrower in a mortgage transaction.

Offer letter

A written offer by the lender to the applicant, which states the terms under which the lender agrees to make a mortgage loan.

Pre-approval

A process in which a conditional commitment is issued after a loan profile is underwritten with all standard documentation except a property appraisal and a title search. With pre-approval, the borrower can make an offer on a property at once, without having to wait to hear from the bank.

Principal

The amount of money borrowed.

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Ratios

Guidelines applied by the lender during underwriting a mortgage loan application to determine how large a loan to grant to an applicant. The ratios that lenders use are generally the Loan-to-Value Ratio, Housing-to-Income Ratio and Debt-to-Income Ratio.

Real estate broker

An individual employed on a fee or commission basis as agent to bring buyers and sellers together and assist in negotiating real estate contracts between them.

Rate of Interest

The percentage amount charged in return for borrowing funds. The rate of interest can be a fixed rate (a certain percentage throughout the length of the term) or a variable rate (a percentage that changes as market conditions change).

Refinancing

Proceeds of a new loan used to pay off an existing mortgage on the same property.

Sales agreement

A written contract setting out the terms under which the buyer agrees to buy. Upon acceptance by the seller, it becomes a legally binding contract subject to the terms and conditions outlined in the document.

Term

The term of a mortgage is the length of time (from six months to ten years) the borrower agrees to the conditions of the mortgage. These mortgage conditions include the rate of interest, the frequency of payments, and how much of each payment is applied to the principal and to the interest, as well as other conditions. At the end of the term, the borrower can pay off the mortgage or renew for another term.

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Title

Written evidence of the ownership of property, such as a property deed.

Title search

A process that examines local public records, laws and related court decisions to determine if any other parties have valid claims against the subject property (such as past due taxes, judgments or mechanics' liens). It also discloses past and current facts about the subject property's ownership.

Underwriting

In mortgage lending, the decision-making process used to determine whether the loan risk is acceptable to the lender. Underwriting involves the satisfactory review of the property appraisal and examination of the borrower's ability and willingness to repay the debt.

Variable rate of interest

A rate of interest that changes during the term as market conditions change.

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