Mortgage Blog

You have sign Mortgage contract agreement with lender for close term and you find yourself to return this mortgage early that means you are breaking mortgage early. Therefore, lender will impose some penalties for breaking mortgage early than contract date. In this article I am going to talk about mortgage penalties in details.  

Variable Mortgage Rate Penalties: -

Variable rate mortgage penalties are limited to 3 months interest for every lender  

For instance, 

Balance Of  x interest rate / 4  

If your mortgage balance is 500,000 at 4.25% then  

$500,000 x 4.25% / 4 = $5312.5 

Sometimes lender use prime rate for calculation of interest rate or sometimes they use contract rate for calculation of interest rate.  

There are several Variable interest rates products that can charge significant amount of penalty generally around 2.50% to 3% of the balance  

If you take previous example which is $5312.5 and now $500,000 at 2.75% then it will be $13750. Thats big difference.  

Most of the lender they offer lower interest rate but at the same time they charge hefty penalty if you try to break it earlier.  

Fixed Mortgage rate Penalties: -  

Usually, fixed mortgage rate has higher penalties rate which is 3 months of interest or IRD (interest rate differential). IRD means the difference between current rate and new rate set by lender.  

For instance,  

You have 5 years of mortgage of $600k at 5.75% and you choose to return it after 2 years. Lender current rate would be for 3 years is 4.50%. you have to pay $22K IRD.  

It's complicated calculation for fixed rate mortgage. If the reinvestment rate falls below than current rate then you have to higher penalties.  

If you are looking for mortgages or any types of question then contact us.  

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