Mortgage Penalties: What Are They And How To Deal With Them?

Mortgage rates can sometimes be deceiving. Big banks lure you in and before you know it, you’re caught in the trap. There is no need for you to pay the posted rate the next time you apply for mortgage. Everyone’s free of that responsibility these days. What is a cause for concern, however, is that such posted rates may be used against you? They will be charged to your penalty in the event you break your mortgage and imagine how much that will cost you.

Here’s the real deal about mortgage penalties for borrowers who break a mortgage contract: they serve as compensation for the interest payments a lender lost because of the borrower’s actions. Just to enlighten you further about mortgage penalties, these pieces of information might come in handy:

The Need To Break A Mortgage Is Spontaneous And Sometimes Unavoidable

It’s certainly important to get the lowest mortgage rate available since houses have become more and more expensive over the years. Even if you are a stickler for discipline and timely, no matter how happy you are about the house you just bought or currently living in, breaking a mortgage contract can happen. That is why you have to think ahead. Inquire or read about mortgage penalties before you sign any mortgage contract. This helps you understand their purpose and why you must pay them.

What You See Is What You Get With Mortgage Penalties

There’s no beating around the bush when you’re penalized. For variable rate mortgage contracts, borrowers will have to pay about three months’ worth of interest. It’s a different calculation for fixed rate mortgage, where penalties are higher than a three-month interest. Penalties for this type of mortgage are computed through an interest rate differential. When you calculate for penalties, avoid using posted rates as you will end up with a higher penalty (use discounted rates instead).

If computing the penalty manually is giving you a headache, just go online and look for websites that provide free mortgage prepayment calculators. These tools help potential clients compute for their penalties, whether they pay for a portion of or the entire mortgage balance.

Mortgage Penalties May Differ

Different lenders may have different computations for mortgage penalties. Several big banks impose huge penalties (i.e. between $5,000 and $7,000 for $250,000 five-year mortgage with a remaining balance of $200,000). For other lenders, such penalties only cost between $800 and $2,800 for the same mortgage. These figures are not set in stone, but this goes without saying that if you want smaller mortgage penalties, and if you want to give your finances more breathing room, do not get a mortgage from big banks. Look for trusted alternative lenders you can transact business with so that even if you have to break your mortgage, you’re spared from exaggerated mortgage penalties.

Getting a mortgage from big banks has its own advantages. But if budget is your primary consideration, it is not the only option available. A lot of small-scale lenders offer more reasonable rates than banks. The more reasonable your mortgage rates are, the more reasonable your penalties are too.