Any homeowner who has tried to get out of a mortgage without facing penalties knows it’s not an easy experience. However, knowing the processes and the potential costs involved can help you make a more informed decision. So, let us discuss debt consolidation and how to get out of a mortgage without penalty. To learn more about debt consolidation solutions, in particular, visit this page.
Selling Your Home Before The End Of A Fixed Year Mortgage
Let’s say you are approved for a mortgage and settle for a five-year plan. It has a variable rate, and you are happy with it. Three years go by, and all is well. But then, you decide you wish to sell your property.
However, there are still two years left on the term. This means that you need to break the mortgage contract if you wish to sell your home. You may be wondering how to get out of a mortgage. Amidst all this, you also call up the bank and learn that doing so will be costly. At this point, you may ask yourself how it can be so expensive to prepay a mortgage. Below, we will discuss the answer.
Why Is Mortgage Prepayment So Costly?
Most of us assume that lenders will be happy when we pay off your loan early, but in reality, this means that the lender will not be getting all the interest payments agreed upon initially.
A particular language used in mortgage contracts indicates that those who wish to prepay their mortgage will incur hefty fees, regardless of their circumstances.
As a result, if you wish to sign up for a new mortgage contract, you need to learn about the penalties.
The Cost Of Breaking The Mortgage
How much a person will pay in penalties to break the mortgage depends upon the mortgage contract type. Here are the various types of mortgages.
Variable Rate Mortgage
These are the types where the interest rate is adjusted regularly to represent market conditions. For example, one may need to pay a penalty of three months if they have a variable rate mortgage. Such a thing will occur on the current balance.
So, if your current loan balance is $100,000 with an interest rate of 2.79%, you are most likely to pay $697.50 in penalties.
The formula for this is:
Interest rate x current balance x 3 months= penalty.
Fixed-Rate Mortgage
Here, both the interest rates and payments are fixed for the term duration. Therefore, such a mortgage offers monthly financial stability. However, estimating the penalty for breaking the fixed-rate mortgage is no easy task. Generally, when one breaks a fixed-rate mortgage, they pay the most significant amount between the three-month interest and the interest rate differential.
The Process Of Figuring Out Penalties
For starters, you need to estimate your three-month interest rate applying the same equation stated above. Once you have mapped out the interest rate differential, you are good to go.
For this purpose, you must know a few things: The current balance on the mortgage, the rate you can extract, and the actual rate. You can quickly get your hands on this information in your online banking profile.
Now, with the same example, let us contemplate that the current balance on the mortgage is $100,000. According to this, the actual rate would be 2.79%, with a current rate of 2.59%. So, by estimating all of this, your interest rate differential is likely to be $400.
How To Avoid Prepayment Penalties?
Explore Prepayment Clauses
A few mortgages are likely to allow you to prepay up to 20% of the mortgage balance. This can be done for up to a year without a penalty. However, it is important to explore prepayment clauses and be aware of any penalties you may incur on the decreased balance.
Port The Mortgage
Many people who are looking to purchase a new property try to avoid a prepayment property. In this process, it is best to port the mortgage. If you have not heard of porting a mortgage before, here’s what you need to know.
Porting your mortgage indicates seeking the current mortgage. This is done by taking the current rate and terms from a specific home to switch it to the next one. People who want to do this can only make it happen when planning to purchase a new property. So, when you are simultaneously selling your old property, this becomes possible for you.
Review The Contract Before Signing
For most people, a mortgage is one of the most challenging documents to sign. That is why one must comprehensively review it when they sign. Such a thing contains thoroughly checking the prepayment penalties. If you have any issues understanding it, do not forget to seek assistance from a professional. You can also derive their help to make sure that you know what you are signing.
Get The Mortgage Assumed
Getting a mortgage assumed means the process through which the seller transfers the mortgage to the buyer. Most loans do not permit such a thing. However, it may come up as an option if the contract allows it. Also, if your differential is relatively high, you might see this coming. That is why it is best to consult a professional in this case.
The Bottom Line
In this article, we have comprehensively explained how you can get out of a mortgage without penalty. So, if you are looking to gather any relevant information, make sure you first go through the points we have stated above for you. They are sure to help you as needed when you need to get out of a mortgage without any penalty.
If you continue to face any issues, make sure you get connected with an expert broker who can detail what to do next according to your specific requirement
