Objective 4: Compute the effective interest rate for fixed-rate residential mortgages.

Terminology associated with Residential mortgage environment.

Mortgagorborrower

Mortgageelender

Mortgage contractlists obligations of borrower and rights of lender

First mortgagefirst legal claim against property if payments are not met

Second mortgagesecond mortgagee gets paid after first mortgagee.

Fixed-rate mortgagerate of interest fixed for a specific period of time

Demand (or variable-rate) mortgagerate of interest changes as market conditions change.

Closed fixed-rate mortgagerestricts right of borrower to increase payments or change mortgage conditions without penalty

Open fixed-rate mortgageallows prepayment or repayment of Mortgage at any time without penalty

Termperiod of time for which interest rate is fixed

Canada Mortgage and Housing Corporation (CMHC) provides mortgage insurance to lenders if Down payment < 20% of Appraised value of Property.

CMHC borrowers must meet STDs by Gross Debt Service ratio & Total Debt Service ratio. For Gross Debt Service, Monthly housing costs incl heating costs cannot exceed 35% of gross monthly household income. For Total Debt Service, monthly debt load % gross monthly income cannot exceed 42%.

CDN LAW REQ Rate of interest charged by Lender must CALC annually or semi-annually, not in advance. Nominal annual rate of interest must be converted into Euivalent rate of interest per payment period, p.