There are many reasons why you might decide to sell your home before your mortgage term is up. Perhaps you’re relocating, your family situation has changed, or your current home no longer fits your needs. Whatever the reason, if you’re considering selling your home early, it’s crucial to understand the financial implications of breaking your mortgage contract.
The Financial Impact of Breaking a Mortgage Contract
Selling your home before the end of your mortgage term can come with various costs, depending on the type of mortgage you hold.
Open Mortgage: If you have an open mortgage, you’re in a favorable position. You can sell your home without facing any penalties for breaking the mortgage contract.
Closed Mortgage: With a closed mortgage, however, you’ll likely incur several costs. The most significant of these is usually the **prepayment penalty**, which can amount to thousands of dollars depending on your mortgage agreement. Beyond this penalty, you might also need to pay administrative fees, appraisal fees, reinvestment fees, and a mortgage discharge fee, which covers the cost of removing the charge on your current mortgage and registering a new one.
If you received any incentives, such as cash-back offers or lines of credit when you first took out your mortgage, these may need to be repaid as well. All these costs can make breaking your mortgage contract an expensive proposition.
Alternatives to Breaking Your Mortgage Contract
If selling your home before your mortgage term ends is necessary, you might have some options to reduce the financial impact:
Blend-and-Extend Option: Some lenders offer a blend-and-extend option, allowing you to extend the length of your mortgage while starting a new term. This option blends the interest rates from your old and new terms, which can help you avoid the steep prepayment penalty. However, keep in mind that there may still be administrative fees involved.
If your lender doesn’t offer this option, your only alternative might be to break the mortgage contract outright. While you could potentially secure a lower interest rate for your new home, it’s essential to weigh this benefit against the prepayment penalty and other fees you’ll incur.
Weighing the Pros and Cons of Selling Early
Before deciding to sell your home before your mortgage term ends, it’s important to consider both the benefits and drawbacks:
Pros:
Lower Interest Rates: Selling your home and purchasing a new one could allow you to lock in a lower interest rate on your next mortgage. If you continue making the same mortgage payments as before, you might be able to pay off your new mortgage faster.
Interest Rate Savings: Moving to a new mortgage might allow you to secure a more favorable interest rate, which could result in long-term savings.
Cons:
High Penalties and Fees: Breaking your mortgage contract can result in significant costs. Even if you secure a lower interest rate, these savings might not be enough to cover the penalties and fees you’ll have to pay.
Mortgage Qualification Challenges: Given current economic conditions, qualifying for a new mortgage might be more difficult than before. If you’re selling your home without the intention of purchasing a new one—such as moving into a rental—you’ll need to ensure that the benefits of selling outweigh the penalties.
Consult an Expert Before Making a Decision
Selling your home before your mortgage term ends is a significant decision with many financial implications. It’s essential to fully understand the costs and consequences before moving forward. Consulting with a mortgage advisor can provide you with the guidance you need to navigate this complex process and determine whether selling early is the best choice for your situation.
The Bottom Line
At Pegasus Mortgage Lending, our team is ready to help you explore your options and make informed decisions that align with your financial goals. Whether you’re considering selling your home early or just exploring your mortgage options, we’re here to support you every step of the way. Contact us today to learn more about how we can assist you in achieving your homeownership goals.
