Prepayment Options for Mortgages: What should you know?

Apr 18, 2023

Prepayment Options for Mortgages

Prepayment Options for Mortgages

Rates, rates, rates. Mortgage Brokers answer a lot of questions, but one thing that rings very true is that people focus very heavily on rates. It would be unwise for us to say rates are not important, because they are very important and a big factor in choosing a lender. However, with that said, rates are not everything, and it is important to understand this to help you get the best situation for you. 

All lenders have different terms, and these can affect the overall value of the mortgage package you are receiving from a lender. We like to call these personalities of a mortgage. It is important to understand elements of mortgage packages from lenders, such as their prepayment options, what breaking the mortgage would look it, if you can port your mortgage, and more/

Today, we are going to talk about prepayment options you may have with lenders and outline why these are an important element to consider in a lender, rather than just the rate.

Prepayment Options for Mortgages: What is a Prepayment penalty?

Before we get into prepayment options, it is important to understand what a prepayment penalty is.

A prepayment penalty is when you either:

  • Pay more than the allowed additional amount toward your mortgage.
  • Break your mortgage contract
  • Transfer your mortgage to another lender before the end of your term,
  • Pay back your entire mortgage before the end of your term, including when you sell your home

It is also important to know that some lenders may call a prepayment penalty either a prepayment charge or breakage cost. 

Prepayment Options for Mortgages: Are Prepayment Penalties Expensive?

Yes, prepayment penalties can cost thousands of dollars. This is why it is important to know when they apply and how your lender calculates them. 

Prepayment Options for Mortgages: What Should you Look out for?

Here at GLM Mortgage Group, we witness many different types of mortgage packages, and all of them come with different prepayment options. We like to say that once you are locked into a package with a lender, what prepayment options are you going to want? It is best to think about it this way, rather than thinking about which prepayment penalties could I achieve.

Let’s break it down. 

There are 3 main types of prepayment options that you may have available to you:

  • % of your monthly payment can be increased
  • Doubling up your monthly payment
  • Lump Sum Payments

Let’s now break each one down separately.

Percentage of your monthly mortgage payment increased: A lender may allow you to have a certain percentage of your monthly payment increased. Varying by lender, it usually is between 10-20% of your monthly payment. This additional payment will be completely towards the principal

Doubling up your monthly payment: A lender may allow you to double up each monthly payment when you choose. This could be double your normal monthly payment, or double the amount after the payment increase above (For example, a lender may allow you to pay 10% more on each month’s mortgage and then also double it when you choose. A $1000 mortgage payment would be $1100 after the 10% increase and $2200 after doubling. The extra $1200 goes directly towards your principal. 

Lump Sum Payments: Lastly, lump sum payments are available. Lender may allow you to pay up to 20% of your mortgage per year in lump sum payments. The lender may only let you do it once per year on the anniversary of your mortgage signing, or at any time throughout a calendar year as long as it’s over $100 and does not exceed 20% of your mortgage amount. 

Prepayment Options for Mortgages: Conclusion

These are all very great prepayment options that can save you tens of thousands of dollars in interest. It is important to not only consider the rates that are available to you, but everything that makes up the personality of the mortgage.

Although it is important to understand what prepayment penalties are, it is most important to consider which prepayment options are best for your lifestyle and prioritize finding a lender that works within those means.

As always, we are available to chat at any time and are more than happy to discuss prepayment options and what route might be best for your situation. Everyone is unique, and it is important to us that we find a perfectly unique balance that best suits you. You can contact us HERE.

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