What happens if you sell your home before your mortgage term ends?

Are you thinking about selling your house? Selling your home is a big decision, and one that home owners might make for a variety of reasons. Sometimes a move is planned, and sometimes life circumstances mean you have to sell your home sooner than expected. Career changes, family growth, financial reasons, or a desire for a fresh start are just a few situations that may prompt a move. In any case, you might be wondering what happens to your mortgage if you sell before your term is up. It’s not uncommon to sell your home before your mortgage term ends. However, it’s important to understand how the process works and what costs you might face so you can plan ahead.

Prepayment penalties

The first thing you should prepare for is needing to pay a prepayment penalty. This fee is designed to allow lenders to still earn money even though you are breaking your mortgage term. The size and type of penalty depends on your mortgage type. Those with a variable-rate mortgage are usually only charged three months’ worth of interest, which is relatively small and not too much of a financial ding. If you have a fixed-rate mortgage, however, you may not be as lucky. Most often, an interest rate differential (IRD) comes into play. This is calculated by comparing your mortgage rate with today’s rates for a similar term. Economic conditions have a large impact on this calculation, as they affect past and present rates. You will be charged either the IRD or three months of interest, whichever amount is higher. Since these numbers can vary widely, you should ask your broker to help you calculate what you will owe before you make any decisions.

Paying off the remaining balance

It’s important to remember that when you sell your home in this situation, you don’t keep all the profits. The proceeds from the sale first go toward paying off your existing mortgage. Your remaining mortgage balance, plus any prepayment penalties and fees, must be paid before you can access any funds. Depending on how much of your mortgage you have already paid off, you may end up with a high or lower amount of leftover money from the sale. Be sure to keep this in mind when you are planning your next move in terms of buying a new home!

Is bridge financing an option?

Some people might look into bridge financing when they need to sell their home and buy another before their mortgage is paid off. Closing dates don’t always align perfectly, meaning you might have to close on your new home before you have access to the proceeds from the sale of your current home. This matters because most home owners use the funds from their home sale to support the purchase of their new property, but how can you do this if your money is still tied up? Bridge financing is a short-term loan that closes the gap between closing on your new home and selling your current one. This can save you from adding to the stress of homeownership by trying to coordinate two transactions on the same day. Your broker can walk you through whether bridge financing makes sense for you.

Other considerations

Remember that there are other costs involved with selling your home before your mortgage term is up. These are the costs that every seller has to pay, no matter when they sell, which are called closing costs. They include things like moving costs, legal fees, home repairs, taxes, and utilities. When you add in your prepayment penalty, you are looking at a fairly high final bill. This is something to keep in mind as you prepare for closing day.

Finally, take a moment to consider the timing before you sell your home during your mortgage term. If you are approaching the end of your current term, can you wait to sell your house? If so, this means you can dodge prepayment penalties as you will have reached the end of your term. This isn’t an option for everybody, but take the time to consider whether it’s possible for you!

Selling your home before your mortgage term ends isn’t uncommon. However, it does come with considerations and costs you’ll want to prepare for. The best step you can take is to chat with your mortgage broker before making a decision. We can help you calculate potential penalties, and determine what your best move is!

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.