There are many reasons you may need to break a mortgage. Life is unpredictable, and perhaps a five year closed mortgage seemed like the right choice at the time, but as we all know circumstances can change. Maybe you need to sell earlier than you thought, or maybe you found a cheaper rate somewhere else. Unfortunately, getting out of a closed mortgage can result in paying a penalty fee, and these can cost thousands, or even tens of thousands of dollars.
Protect Yourself From The Beginning
When it comes to signing a mortgage, the language that’s used in the documents can be complicated and difficult to understand, especially for an inexperienced buyer. In this way, you can get stuck paying penalties larger than you expected, or not being able to get out of the mortgage at all.
Though it can seem daunting, it’s worth learning how to read legal documents. When it comes to your mortgage, or anything involving substantial amounts of money, it’s imperative that you know exactly what you’re agreeing to. Even if you use a lawyer to go over these documents with you, don’t completely let them take the reins. You should understand every detail of what you’re signing, and you should be able to use these details to foresee any future issues.
It’s useful to calculate mortgage penalties before you find yourself in a position where you have to get out of your mortgage. The more prepared you can be, the better.
How Do I Calculate Penalties?
There are online penalty calculators available, but it is recommended that you calculate the penalty yourself so you know what you should be paying.
There are two methods you can use to calculate what you will be paying, but whichever of the two is higher is the one you should be prepared to pay.
- Three Months’ Interest: Your next three mortgage payments plus interest.
- Interest Rate Differential: The current rate of however many years you have left on your mortgage, subtracted from your original rate and multiplied by your mortgage balance.
Using these methods you can easily calculate what your penalty should be. Again, do this in advance, so you can plan ahead before it becomes an emergency.
By ensuring you understand the agreement you’re entering into, and calculating possible penalties you can stay on top of your mortgage and avoid unpleasant surprises. While you can’t exactly get out of a mortgage penalty-free, you can take steps to make sure you’re not paying any more than you have to.