Posted by John Doe
As a homeowner, you may be faced with some different scenarios that cause you to consider breaking your mortgage contract early. However, before you call your lender, you need to understand the costs involved in your decision.
Why Break Your Contract
There can be a number of reasons that you want to break your mortgage contract. These include:
- Paying it off early
- Selling the home
- Find a better rate
Whatever the reason for wanting to break your contract, it’s important to know that you are within your legal rights. Even if you are looking at renegotiating with your lender, you will be breaking your old mortgage contract and signing a new one. You must review your mortgage contract to understand what is involved in the process, as it can differ between lender and lender.
However, if you are breaking the contract before it is up for renewal, your decision will come with a cost. Therefore, if you are trying to put yourself into a better financial position by selling the home or finding a lower rate, you need to consider the costs involved with breaking your mortgage contract early. You may even end up finding that you are no further ahead financially.
Costs of Breaking Your Contract
When it comes to ending your mortgage contract early, whether you are breaking it to sign a new one or trying to pay off the debt early, there are a few different costs involved:
- Administration fee
- Appraisal fee
- Prepayment penalty
- Reinvestment fee
- Re-registration fee
- Any cash advance you received when you signed your mortgage papers
If you attempt to break your mortgage contract early, you will face what is known in the industry as prepayment penalties. These are fees that you need to pay to get out of the contract. They are different for each borrower, depending on the details of your mortgage.
If the mortgage agreement you signed were a variable, you’d be required to pay three months of interest payments on your current balance to break the contract. This is where you will need a calculator to determine the costs of breaking your variable-rate mortgage early.
To determine the total amount you owe in prepayment penalties, multiply the interest rate with your current mortgage balance. Then, take that sum and times it by three. For example, interest rate X current mortgage balance X 3 (three months).
For homeowners with a fixed-rate mortgage, the calculation is a bit more complicated. Lenders will require you to pay back either the three-month interest amount or the interest rate differential, whichever one is higher.
An interest rate differential is calculated by taking your fixed interest rate and subtracting the current market rate. You multiply that number with your current balance. Finally, that sum is multiplied by the number of months left remaining on your mortgage. For example (mortgage interest rate – current market rate) X current mortgage balance X months left on the contract.
Depending on the numbers you are working with, you may find the cost of breaking your mortgage to be in the thousands of dollars.
However, you should talk to your lender about their prepayment penalties policies. If you are breaking your mortgage and signing a new one with them, they may be willing to reduce the prepayment penalty you are required to pay.
Avoiding the Prepayment Penalty
If you want to break your mortgage contract, but are concerned about the financial cost, there are some things you can do to put yourself in a better position. These include:
Know your contract: Look over your contract thoroughly before you sign it. Be sure you understand any prepayment penalty clauses. If you are not sure what they mean or how they could impact you down the road, be sure to ask someone you trust. Some mortgage contracts allow you to pay down some of your mortgage debt each year without facing a penalty. But be aware of this option, as you may want to use it to avoid prepayment penalties.
Blend and extend mortgage: If you are looking for a way to extend your mortgage without paying high fees to break the contract, ask your lender about a blend and extend option. With this option, the interest rate from your old mortgage contract is blended with the new rate to find you an in-between rate. You will need to talk to your lender about how they calculate the new blended rate and whether this would be a good option.
Port your mortgage: If the reason you are looking to end your current mortgage is that you want to buy a new piece of property, talk to your lender about porting your mortgage. This means you take it with you to your new home. However, there may be some rules about doing this, so you will need to discuss the option with your lender.
Have your mortgage assumed: For those who are selling the property, consider having the new buyer assume your mortgage. This means that they will take it over, and you will be free of it. However, like with porting your mortgage, you will need to discuss it with your lender.
When it comes to breaking your mortgage contract, you should consider all the costs and fees that you will be required to pay. In some cases, it may not be the best financial option for you. While for others, breaking the mortgage and paying off the debt early could be the best thing.