Closing A Mortgage Before The Maturity Date

Just about everyone who buys a home will get a mortgage

. A mortgage is set for a pre-determined period. The maturity date of a mortgage is the last day of the term of a person's mortgage. At this time, any outstanding balance is due on this date. If the mortgage holder has an outstanding balance, he or she will normally have the option to renew the mortgage into a new mortgage with a new principal amount, interest rate, term, and amortization. If a mortgage holder closes the mortgage before its maturity date, there can be a number of penalties.

The amount of time it takes to repay a mortgage in full is based on the payment amount, payment frequency, and the interest rate. You can choose conventional mortgages that range from 1 to 35 years. The longer the amortization period, the less each monthly payment will be but the more interest you will pay overall. If the term of the mortgage is closed prior to the maturity date either through early renewal, discharge, or sale of the home, the mortgage holder may incur financial penalties

Most lenders charge an early payoff penalty on closed mortgages if the mortgage amount owed is paid prior to the maturity of the term. The lender must describe the penalty they could charge on the mortgage agreement. The applicable penalties would be equal to the greater of the interest rate differential or 3 months interest plus any applicable fees related to the discharge request. That is, whichever amount is the larger of these two numbers will be the penalty amount that is applied. The current mortgage balance is multiplied by the mortgage holder's interest rate and then multiplied by three.

If you close your mortgage prior to the maturity date, you can incur Interest Rate Differential/Loss of interest penalties. This is the difference between the interest rate on the mortgage agreement compared to the rate at which the lender can loan the money out again. Another possible penalty that can be applied is 2 months penalty interest calculated on the outstanding balance during the first 3 years of the mortgage term and no penalty charged for the rest of the term of the mortgage. Calculating penalties vary among lenders. It is important not to assume the penalty charges you agreed to in your original mortgage will be the same when you renew with the same lender. Penalty charge policies are always changing as the law regarding acceptable practices for calculating penalties is still evolving.

When learning about applicable penalties applied when closing your mortgage prior to the maturity date, it is always wise to consult with a mortgage broker or your mortgage lender to ensure you have all of the most accurate and up-to-date information before you choose to close the mortgage. You may find that it is financially beneficial to allow the mortgage to reach its maturity date as it could save you from paying out a significant amount of money on penalties charged by the lending institution.

by: Adrianna Noton

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