Advanced Mathematics
What you need to know about mortgage penalties.
People who enjoy math say they like it because it is logical. Predictable. Let’s make one thing clear: Those people are not talking about the math used to calculate mortgage penalties. Truth is, the penalty formula used to figure out how much you’ll pay if you need to get out of your mortgage early makes a big difference…and different institutions use different formulae.
Understand the math before you get your mortgage.
Few people get a mortgage thinking they’re going to try to get out of it early. But things happen: you are offered a teaching position in a different city. Or rates have gone down, and you could really use the extra money to help save for a 4 over 5. Amedeo Perfetto, Educators Director of Lending Services, says that many of his clients often ask about how to get out of a mortgage early.
Before signing on the dotted line, one of the key things you need to understand about your mortgage is the rate your lender uses to calculate a penalty. A look at the chart below illustrates the impact that the different rates used by a mortgage broker and a bank can have on the penalty.
| Penalty From a Broker Lender | |||||||||||
| Contract Rate (Your actual mortgage rate) | 3.89% | ||||||||||
| Current Rate on Matching Term (The rate that you would pay today closest to the term remaining on your mortgage at a broker) | 2.29% | ||||||||||
| Differential (Contract rate minus Current Rate) | 1.60% | ||||||||||
| Remaining Balance | $174,000 | ||||||||||
| Remaining Months on your Mortgage | 12 | ||||||||||
| Penalty Formula (Remaining Balance x Differential/12 x Remaining Months) | $2,784 | ||||||||||
| Total Broker Lender Interest Rate Differential Penalty (approximate) | $2,784 | ||||||||||
| Penalty From a Typical Bank | |||||||||||
| Contract Rate (Your actual rate on the mortgage) | 3.89% | ||||||||||
| Current Posted Rate (The rate that you would pay today closest to the term remaining on your mortgage at a bank) | 3.14% | ||||||||||
| Original Posted Rate (The posted rate at the time your mortgage started) | 5.69% | ||||||||||
| Original Discount off the posted Rate (This is the amount of the discount that the bank offered at the time your mortgage started) | 1.80% | ||||||||||
| Remaining Mortgage Balance | $174,000 | ||||||||||
| Differential (Contract Rate minus (Current Posted Rate minus Original Discount)) | 2.55% | ||||||||||
| Remaining Months on your Mortgage | 12 | ||||||||||
| Penalty Formula (Remaining Balance x Differential/12 x Remaining Months) | $4,437 | ||||||||||
| Total Bank Lender Interest Rate Differential Penalty (approximate) | $4,437 | ||||||||||
| Assumptions: Mortgage Start Date: April 2011, Mortgage Term: 5 Years | |||||||||||
Other factors that will cost you.
There’s more. In order to discourage you from leaving early, some lenders will add a penalty for getting out of your mortgage early, even if you’re close to the end of your term. “Reinvestment fees” are also often charged. There’s even sometimes a ‘sales only’ clause in a mortgage, which prohibits you from leaving the lender unless you sell the home.
The lesson? Learn from the pros.
Be aware that banks usually charge more in penalties than a mortgage broker, and get the advice of a professional lending expert before you get your mortgage. The mortgage brokers at Educators Financial Group know what to look for before you sign on the dotted line of your mortgage, and can help save you money. Book an appointment online or call us today at 1.800.263.9541.
The information in this article is general only; it is not intended as specific investment, financial, accounting, legal or tax advice for any individual. Broker license 12185.
