There are a variety of reasons that you might choose to sell your home before the mortgage term ends. The most common reason is that you are moving to a new location or that your family situation has changed, with the addition of children or adult children moving out. In all these cases, your home no longer meets your needs, and you may want to break your mortgage contract. If you are considering selling your house early, make sure that you understand the costs that are associated with breaking the mortgage contract.
The Costs of Breaking the Mortgage Contract
The cost of selling your home before the mortgage term ends and breaking the mortgage contract will depend on your mortgage type. If you have an open mortgage, you can sell your home without paying penalties for breaking the mortgage contract.
However, if you have a closed mortgage, there will be penalties for selling your home before the term is up. The highest cost will be the prepayment penalty, which is the fee for breaking the mortgage contract. The prepayment penalty can be thousands of dollars, and will vary based on the terms of your mortgage contract. There will also be administrative fees, appraisal fees, reinvestment fees and a mortgage discharge fee, which removes the charge on your current mortgage and registers a new one.
You may also have to repay any cash-back or lines of credit you received when you got your mortgage. These fees can make breaking a mortgage before the term ends very pricey.
Options for Breaking the Mortgage Contract
There are options if you are thinking about selling your house before the mortgage term is over. Some mortgage lenders may allow you to extend the length of your mortgage while beginning a new mortgage in a Blend-and-Extend option. In this option, the interest rates for the old and new terms are blended, and you won’t have to pay the prepayment penalty. However, you may need to pay administrative fees.
Unfortunately, not every mortgage lender offers this option, so the only other choice is to break the mortgage contract. In this case, you may get a lower interest rate on your new home, but you will have to pay a prepayment penalty for breaking the contract. If you have a choice in whether you sell your home before the mortgage term ends, ensure that the benefits of breaking the contract early outweigh the costs of paying the prepayment penalty and any other associated fees.
Pros and Cons of Selling Your Home Early
It can be tempting to break your mortgage or sell your home if you see a lower interest rate or a home that better meets your needs. In some cases, you may not have much of a choice in the matter, such as if you have to move for work. Here are some of the pros and cons of selling your home before the mortgage term ends and breaking the contract:
Pro: You may be able to get a lower interest rate and be able to pay off the mortgage faster if you keep the payments the same. When moving into a new house, it is possible that you could get a lower interest rate than on your previous mortgage, and if you budget your mortgage payments as if you are paying into your old mortgage, then you could pay off your new mortgage early.
Con: You could end up paying more in the long run because of fees and a prepayment penalty. The fees for breaking a mortgage before the term ends are very high, and even if you make higher payments on your new mortgage, there is no guarantee that the interest saved will be enough to cover the penalties. However, your mortgage advisor can run the calculations for you.
Pro: You may be able to lock in a lower interest rate for the new mortgage term. Selling your house allows you to look for a lower interest rate for your new home, saving you money in the long run.
Con: You may no longer qualify for a mortgage under current economic conditions. Times are tough, and it could be that you are selling your house not to buy a new one but to move into a rental. If this is the case, ensure that the benefits of selling your home early outweigh the costs of the penalties.
Before selling your house early, make sure that you read all of the fine print to see what costs are associated with breaking the mortgage contract. A mortgage advisor can provide valuable advice to navigate the possibility of selling your home before the mortgage term ends.