Paying off your mortgage loan garners substantial financial relief for homeowners. However, before you start paying off lump sums to your mortgage provider, you may want to know if there is a penalty for paying off your mortgage early.
Many homeowners need to learn that there can be penalties for paying off their mortgage loan early or exceeding the annual payment amount. For this reason, it’s essential to learn about the various penalties and how to avoid them with Houston’s trusted mortgage broker.
Determine Your Mortgage Type
To determine if you can pay off your mortgage without penalty, you first need to know if you have an open or closed mortgage. An open mortgage allows you to make as many payments annually as possible and pay off the entire loan at any time throughout the loan term.
However, closed mortgages have specific loan terms outlining repayment conditions that can lead to various prepayment penalties when broken. Furthermore, many assume refinancing can change the outcome, but you’re always responsible for the total amount of the original closed mortgage.
Prepayment Penalties
All mortgages have terms. Typically, if you have a close mortgage, expect a prepayment privilege. This includes a specific amount of time and a set limit that the lender creates that allows you to increase your payments or make lump sum payments to the loan balance. However, you will face a prepayment penalty when you exceed these limits and percentages.
Exceeding Annual Repayment Limit
The first type of penalty involves exceeding the annual repayment limit. For example, if the set term percentage for your prepayment privilege is 10%, then you can only pay that maximum extra amount toward your mortgage loan payments. If you exceed this capped amount, your lender may determine a penalty.
Paying off Home Early Charges
Instead of paying more annually, there are fees for settling your mortgage early. Typically, lenders need time to make money off your loan interest rate. If you pay your mortgage before the agreed-upon term ends, the mortgage company loses out on making money through the loan’s interest. However, paying off your mortgage ahead of term enables you to rid yourself of a hefty financial burden.
If you want to pay off your mortgage in full before the original terms, you can expect different penalties based on your loan type. Fixed-rate mortgages have different penalties than variable-rate mortgages.
Typical Penalty Amounts
Fixed-rate mortgages typically face a penalty of three months of interest. However, sometimes fixed-rate mortgages have a different method using the IRD or interest rate differential. To determine the IRD, the lender follows this formula (Annual Interest Rate Differential x Current Mortgage Balance x # of Months Left in the Original Term).
If you have a variable rate, most lenders use the three-month interest on the amount of the prepayment. For example, if your mortgage interest rate is currently 5%, and you go over your payment by $20,000, you can expect to pay $1,000 extra, which can exceed it depending on the terms and months of repayment.
How To Avoid Early Mortgage Payoff Consequences
Many homeowners are ready to pay off debt earlier, but be aware of a penalty for paying off your mortgage early. Skip the early mortgage repayment penalties by speaking with experts or your lenders about your terms and the potential to refinance. Champions Mortgage can talk you through financing needs and how not paying your mortgage over the agreed terms compares to paying off lump sums.
Instead of wondering if there is a penalty for paying off your mortgage early, get the answers you need from experienced lenders at Champions Mortgage in Sugar Land, TX, today at (281) 727-2500!
