You’ve done it!
After years of saving, careful financial planning, and a little bit of luck, you’ve cobbled together enough money to pay off the mortgage. In fact, you’re way ahead of schedule! Years, even. So obviously, it’s time to make the final payment, pop open the champagne, and toast to your new status as an official homeowner.
Except… maybe not.
This might come as a shock to you, but banks like to charge a lot of fees.
They charge you for not having enough money, they charge you for trying to access your money, and yes, they even charge you for paying off a mortgage early.
You see, by paying off a mortgage ahead of schedule, you’ve thrown a wrench into their carefully laid plans. They expected to make thousands of dollars off of your interest payments, and so they’ll want to find another way to make back that money.
That’s why many loans come with a prepayment penalty clause designed to discourage borrowers from completing the contract too early. These are calculated in one of several ways.
Some charge based on a percentage of the loan balance. So, if you owe $50,000 on the mortgage, and the penalty is 2%, then you’ll pay $1000 extra.
Other lenders charge based on interest costs. They figure out how much interest they are likely to lose out on, and then calculate what the penalty will be. The actual calculations vary from lender to lender, so it’s important to know beforehand what factors your bank or lender uses to calculate this. Usually, they use the number of months of interest payments they are missing out on.
Some banks are far more straightforward and charge a simple flat fee.
There are certain ways to get around these restrictions. Instead of paying off the entire mortgage all at once, you could pay it off in larger installments, say 20% a year. Again, these numbers will vary by bank, which is why it is essential that you speak with a mortgage broker before you sign on for a mortgage to ensure the terms of your agreement suit your specific needs.
With a mortgage broker on your side, you can figure out exactly which kind of penalty you could face if you’re fortunate enough to pay off your mortgage early. The penalties can change over time, and may not even apply after a certain period, which is vital to know in order for you to plan for the future financially.
Even if you think it’s likely that you’ll pay off the mortgage early, knowing your prepayment penalty is important. By comparing different mortgages and terms, it’s possible that you could make a deal that has a higher prepayment penalty in exchange for financial relief in other areas, such as a lower interest rate. Mortgages are negotiations, and a mortgage broker can help you negotiate a deal that works mostly to your advantage.
So, whether you’re approaching the end of your mortgage, or are just now thinking about getting into the market as a first-time home buyer, be sure to give me a call at 705-315-0516. I can help you understand all the options available to you, to find you the best mortgage rates & options to suit your unique financial situation.