Major life changes can, sometimes, force you to make difficult decisions, such as getting out of a fixed mortgage.
Work and family relocation, a separation, or the death of a family member may force you to sell your home and cut ties with your mortgage lender. Most homeowners have mortgages with a five-year term, while others have longer repayment periods. If you need to terminate your loan earlier than expected, you’ll be asked to pay thousands’ worth of penalty fees.
Below, get to know what these fees are about, and how you can avoid paying for penalties or negotiate for reduced fees when getting out of a mortgage agreement.
Mortgage Prepayment Penalty Charges
Mortgage terms and products vary from one lender to another—whether traditional lending institutions or online mortgage companies. Some may take as short as five years, while others can last as long as 15 years. This means that you’ll have to make monthly payments for the said period before the loan closes.
If you decide to break out of your mortgage, your lender may ask you to pay the mortgage prepayment penalties. The penalty costs are often based on the number of years left on your mortgage plus the interest rates. Most lenders charge three months’ worth of interest costs on your outstanding balance.
Thus, you can end up paying hefty fees. This is a problem if you’re cash-strapped or need to sell a house in foreclosure.
How To Avoid Penalty Costs
Review Your Contract Before Signing
This advice works for mortgage borrowers who’ve yet to take out a home loan.
Before singing the documents, read and understand the terms of your mortgage. Now that you know the hidden costs of pre-terminating your loan, check what the lender says about the prepayment penalties.
The best way to avoid penalties is to get a mortgage deal without them. Apart from reading the fine print, you may want to seek the advice of a legal expert to fully understand what you’re getting into.
Explore Your Options
If you have an active mortgage and are planning to sell your home soon, review and study the mortgage documents. If you have an existing mortgage that has prepayment penalty terms, find out your options to at least reduce the penalty fees. Check the papers you have on file to find out more about how penalties are calculated by your lender.
If you’ve formed good relations with your bank or loan officer, ask for pointers on what applies in your case and how to avoid or reduce the fees.
Wait Until The Penalty Expires
Your mortage documents will contain information regarding your mortgage closing date, including the expiration of pre-penalty fees.
After learning your mortgage’s prepayment penalty cost expiration, you can then set a favorable period for refinancing. Be reminded that your lender may not be capable of updating your account on time. Take a proactive approach and contact them to request for an updated statement.
Sell the House To Cash Buyers If You Have a Soft Prepayment Penalty
Prepayment penalties could either be soft or hard. The latter is more stringent, requiring borrowers to pay fees if the property is sold or refinanced before a specific period. Inversely, a soft prepayment penalty only prevents a borrower from refinancing a property prior to a specified date.
If you’re a home seller whose lender has imposed a soft prepayment penalty, the property can be offered for sale after the close of the first loan, and you won’t have to pay for extra fees. That’s because penalties aren’t assessed when you sell your house under soft prepayment penalty.
Port Your Mortgage
Most home sellers are also on the lookout to buy a new property, that’s why porting a mortgage may be a viable option. Porting means taking your current mortgage, including its current rate and terms, to your new property.
You’ll avoid paying for prepayment charges as the amount is transferred to your new home, even if you break the mortgage early. As mentioned, this is only possible if you’re buying a new property and selling your current home. Porting a mortgage requires an approval from your lending institution.
The Wrap Up
Whatever the reason may be, cutting ties with your mortgage lender entails costs and penalties. While the most effective way to avoid prepayment penalty is to get a mortgage deal that doesn’t have one, it’s not the end of the world for those with existing mortgages.
The key to skipping exorbitant penalty charges is in reviewing the mortgage terms and speaking with representatives from your lending institution, or a legal expert, for possible options, few of which have already been mentioned in this article.