All You Need to Know About Mortgage Prepayment Penalties

Surprisingly, many mortgage loans have prepayment penalties that restrict your flexibility and even drain your bank account merely for trying to manage your money correctly. Being punished for getting ahead of the game sounds ridiculous, and we aim to explain why. 

What is a mortgage prepayment penalty?

Some lenders charge a fee when you pay off all or a portion of your mortgage loan early. This price is known as a mortgage prepayment penalty. The penalty fee encourages borrowers to repay their principal gradually over an extended period so that mortgage lenders can earn interest.

However, not all mortgages have prepayment penalties. If you have an open mortgage, you are free to pay as you please. There are zero penalties for making extra payments in the case of an open mortgage. 

Why do lenders charge a prepayment penalty?

A mortgage penalty exists to protect the lenders. They take on more risk than borrowers during the initial years of a loan term. This is because most borrowers still need to make sizable down payments compared to the home’s value.

Lenders charge you interest as compensation for this risk of financial loss. They lose out on all those interest charges built into the loan as a perk for them to lend to you in the first place if you pay the mortgage off quickly. 

What triggers the fee

Your mortgage lender may assess a prepayment penalty if you pay more into your mortgage than is permitted by law. Additionally, if you breach the terms of your mortgage agreement, move your loan to a different lender or pay off the entire balance of your mortgage before the term is up (even when you sell your house), you will face a prepayment penalty fee. 

You can be charged thousands of dollars in prepayment penalty fees. As mentioned earlier, you must know if the rules apply and how your lender tallies up the final payment. 

However, if your mortgage is still active, you are not subject to any prepayment or lump-sum payment fees. Your lender may also refer to the prepayment fee as a breakage fee or prepayment charge.

How to avoid it

There are various ways to avoid triggering prepayment penalties. First of all, know what your rights and privileges are. Educate yourself on how you can protect yourself from these fees. 

When you renew your mortgage, compare what each lender is offering. Get in touch with several lenders and mortgage brokers to see if any better solutions may provide you with more flexibility. Consider going for an open mortgage to avoid penalty fees.

Before breaking your mortgage, make a lump-sum prepayment. If your contract termination date is approaching, some lenders may limit your ability to prepay.

If your prepayment penalty is a hefty fee, consider delaying your prepayment until the conclusion of your term. Then you are free to prepay in full without incurring any fees.

Ask your lender if you may move your mortgage if you are purchasing a new property. This entails moving to your new home with your current interest rate, terms, and conditions. Doing so prevents you from breaking your mortgage agreement and obtaining a new one.

Is it worth paying off my mortgage early?

There are numerous advantages to paying off your mortgage early. Most notable is living debt-free. You are also reducing the number of years you would be paying off any interest fees.

Another added advantage? The safety of owning your home. You won’t have to worry about being kicked out or having your home foreclosed by the bank. 

Call us Today!

Navigating through the complicated language of mortgage contracts can be challenging. At Axiom Mortgage Solutions, we work for you and cater to your financial needs to protect you from unwanted mortgage prepayment penalties.

Call us at 1-800-517-8670 or complete our online contact form to get started.