You have to be careful of penalties for a mortgage because the bill can be salty if you want to pay off your mortgage before it expires. This article will give you the information you need to set penalties, read the mortgage agreement well and ultimately avoid pitfalls.
“The capsule aims to show you how to calculate a mortgage penalty. I will show you the calculation that your credit union or bank makes to determine how much you owe it if you complete your mortgage before its term. In reality, the way it works is that they will do 2 calculations. Two different calculations. And then after that, they take the bulk of the two amounts and then it will become your penalty. »
Here Are His Examples of Calculations:
$240,000 over 25 years at 4% PMT-$1262.45 per month for a 5-year term (60 months)
In the 20th month we would find ourselves having a balance of $230,318
As of the 20th month, the principal of the mortgage payment (PMT) is $499.39 and the interest is $763.06
The first option is to pay 3 months of interest, or $763.06 x 3 – $2,289.18
At the 20th month the balance of the mortgage is $230,318
The bank will calculate your balance at the end of the 5-year term which would be $208,929
At first, the 5-year term was 4%. When you finish the mortgage you take the current rate, say 3.25%.
For the purposes of the calculation, the bank will update the $208,929 and bring it back as of today for how much it would still have to pay.
So at 3.25% there would still be $235,456 to pay.
Our current balance of $230,318 is subtracted from this amount.
The penalty would be $5138 under this calculation.
Since the mortgage lender always takes the highest amount, the penalty would be $5138.
Read the Loan Agreement Well
Mortgage contracts vary from one financial institution to another. It is crucial to read the contract well before signing it. The loan manager may be in a hurry to get you to sign this contract, but it is his duty to explain the terms that define the penalty. You ask them to explain a mortgage repayment scenario and demonstrate the calculation of the penalty. For example, ask them to explain the penalty calculation to you halfway through the term.
If the person advising you at the financial institution does not do the trick, I strongly recommend that you do business with a mortgage broker. This one will advise you, help you calculate the penalty and avoid the pitfalls.
As Kevin Naboulsi mentions in one of his articles, banks can promote mortgage rates. The significantly better interest rate can be misleading and you have to be careful. The mortgage product can be extremely restrictive and may contain unreasonable penalties. The mortgage lender may not allow the mortgage to be fully repaid before maturity or limit prepayment to 10% per year.
You read in this article how to define the penalties of a mortgage, read the contracts well and avoid the pitfalls. Do not pay thousands of dollars in penalties to the financial institution that has lend you money by being well informed.