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Penalties for Mortgage Prepayment


The penalties for mortgage prepayment, or early payout because you sell your house before the mortgage maturity date, can be very severe.


On this page, we will cover possible penalties for paying a mortgage off early, the mortgage interest penalty and some possible solutions to any of these problems.


If you have an open/variable interest rate homeowner's loan, that is not locked into a fixed term, you can skip this section of mortgage help.


If your rate is locked into a fixed term, ie: 3, 5, 7-year term, I suggest you read this section.


The first thing you should do and preferably before you even place your house for sale on the market is check out your contract documents.



If you are looking for some other mortgage information than what's on this page, just select any of the photo links below.



Somewhere in the fine print you will find the terms of your contract concerning penalties for mortgage prepayment.


The most common terms of penalties for mortgage cancellation are either:


  • 3 months interest.


or


  • The interest differential.


Whichever is GREATER


This is the only penalties for mortgage prepayment and early payout we will cover here.


What Does that Mean to Me?


Well, my dear reader, that is what we are about to look at on this penalties for mortgage prepayment page.


It can mean a huge shock on your bottom line should you not take some steps ahead of time, before you accept an offer.


- Note: The following examples are the most common penalties for mortgage prepayment.

. Where you live may be different. Checking with your lender, is the only way to find out for sure.


Let's look at a couple of examples:


You took out a mortgage of $250,000 for a 5-year term @ 4.5% interest.


You are making monthly payments and your amortization is 25 years.


You have 3 years remaining on the term.


A new loan for the same 5-year term is now @ 6.5% interest.


Your mortgage penalty in this case under the 3 months interest or interest differential should be the 3-month interest penalty, but please check to make sure.


This penalty should be about $2,654.00.



The Second Example


You took out a mortgage of $250,000 for a 5-year term @ 6.5% interest.


You are making monthly payments and your amortization is 25 years.


You have 3 years remaining on the term.

A new loan for the same 5-year term is now @ 4.5% interest.

Your mortgage interest penalty in this case under the 3 months interest, or interest differential, should be the interest differential.


These penalties for mortgage prepayment should be about $12,846.00!


Now that I have your attention, you can see why this might be important.



Why Do they Do This?

This is an Outrage!


Hold the phone for a minute. When you signed your contract, the lender was counting on you making your payments to maturity @ 6.5% interest.


The bank has investors that invest their money into mortgage funds, expecting a certain rate of return on that money.



The bank also borrows money to use for home loans from world banks etc.


The lender based that rate of return to the investors, from your 6.5% interest that you are paying.


You now breached that contract by paying out the debt 3 years early.


The lender is now out that $12,846.00 in interest. They still have to pay their investors the agreed upon rate of interest of the mortgage fund.


Sorry, you are the person that has to make up the shortfall.


This, of course, is a very simplified explanation, but I believe it gets the point across right?


What Can You Do About This?


I'm glad you ask. Here is a step by step suggestion in the order you might want to take to get some mortgage help.


A Visitor's Comment

My name is XXXX and I am a first-time seller. I am really impressed with your site--it has been my guide throughout this process.

Step 1. - Call your lender and ask for some clarification about your particular mortgage terms.


Step 2. - Ask what your penalties for paying off the mortgage early would be.


Step 3. - Ask if your mortgage is portable. (this should be written on your documents as well). Check out what a Portable Mortgage means.


Step 4. - Ask if your loan is assumable and if so, how long you are liable, should the buyer default on the contract. (this information should also be on your contract papers.) For an explanation of An Assumable Mortgage


Step 5. - Ask what your penalties for the mortgage as a seller would be, if you place a new home loan with them.


Step 6. - Ask what your mortgage penalty would be, if you and your buyer both, place new mortgages with your lender.


Step 7. - Write all the answers given down to review later.


Step 8. - Go over all the figures so you can make a decision most beneficial to you.



What Should I Do?


Let's look at some penalties for mortgage prepayment plans of action.


If interest rates have gone up since you took out your mortgage, you should be in relatively good shape. Based on the 1st example above, you should be out a maximum of approximately $2,654.00.


This is still probably money you would rather have in your pocket, so you try to make a deal.


  • If your home loan is portable, take your old loan with you and put on the next house you are purchasing.


I don't want to get too complicated here, but if the new mortgage is larger, you will have to find out if you can blend both loans together. Find out about Blending Mortgages Here


  • If you have an assumable, you might consider having the buyer do an assumption. This needs further explanation on several fronts, so will handle that on a separate mortgage help page.


  • Try to get a reduction or even a total forgiveness of the penalty, by promising to stay with the same lender for your new mortgage.


  • Try to eliminate the mortgage penalties for early repayment totally, by having your mortgage and the buyer's, placed with your present lender.


- Note: One way to receive some mortgage interest prepayment penalty relief is to put right in your purchase and sales agreement, that the buyer has to finance with your lender.




Of course, the buyer has to agree.


The Tougher Plan


If your situation is the 2nd example, things get a bit more complicated.


Here are a few mortgage help thoughts you might want to consider.


  • Take your house off the market until you are either closer or finished with your present mortgage term.


  • Wait to see if interest rates go up, whereas the interest differential is lower, or you are only facing the 3 months interest penalty. Of course then you will just be paying a higher interest rate on the new mortgage. hardly a good plan.


  • If you have to sell, try some of the bargaining steps outlined in the 1st example above.




-Note: You probably won't be able to get the buyer to assume the contract. The reason, of course, is that your loan is at 6.5% to assume and the buyer can get a new 5-year term mortgage at 4.5%




You will probably not get out clean altogether, but you can still try to bargain for a lesser mortgage cancellation penalty.


The main purpose of this penalty for mortgage prepayment page is to alert you to the possibility of a large mortgage prepayment penalty should you not check your obligations before you sell.

As I stated in the beginning, this should not be a problem if you have an open/variable interest rate mortgage. The rate floats month to month so there are no large costs to the lender, should you pay out early.


An open mortgage can normally be locked into a fixed rate term mortgage, or paid out at any time.


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