What Happens If I Break My Mortgage Early?
You can break a mortgage before the end of its term, but there can be a cost. The amount depends on the lender, mortgage type and the specific terms of your agreement. Before making a change, compare the cost of breaking the mortgage with what you gain by doing it.
← Back to Mortgage Strategy QuestionsBreaking a Mortgage Early Can Trigger a Prepayment Penalty.
A closed mortgage is priced on the assumption that it will remain in place for the agreed term. If you pay it out early because you sell, refinance or switch lenders, the lender may charge a prepayment penalty along with applicable discharge or administrative costs.
Fixed Mortgages
Fixed-rate mortgages can use lender-specific penalty calculations, and the resulting prepayment charge can sometimes be substantial.
Variable Mortgages
Variable-rate mortgages commonly use a different prepayment-penalty structure than fixed-rate mortgages. The actual mortgage terms determine the charge.
Discharge Costs
There may be discharge, administration or legal costs in addition to the mortgage prepayment penalty.
The Lender Matters
Two mortgages with similar rates can produce very different penalties because lenders can use different contractual calculations and policies.
The Timing Matters
The amount of time remaining in the mortgage term and the circumstances of the payout can affect the cost of breaking the mortgage.
Get the Actual Payout
Do not rely on an estimate. Ask the lender for a current payout statement showing the mortgage balance, penalty and applicable charges.
A Large Penalty Does Not Automatically Mean You Should Keep the Mortgage.
The penalty is a cost, but it needs to be compared with the financial benefit of whatever you are trying to accomplish by breaking the mortgage.
Refinancing may reduce other expensive debt, improve monthly cash flow or create savings that are larger than the penalty. In other situations, the penalty may make waiting until maturity the better decision.
Start with the lender's actual current payout and prepayment charge.
Include the new rate, applicable fees, appraisal and legal costs in the comparison.
If refinancing pays off expensive unsecured debt, calculate the interest and monthly payments being removed.
The decision should be based on whether the overall improvement justifies the cost of breaking the existing mortgage.
Sometimes Changing the Mortgage Is Worth the Cost.
Homeowners break mortgages for many reasons. The right analysis depends on why the existing mortgage no longer fits the situation and what the replacement financing will accomplish.
Refinance for a Better Structure
A refinance may create a mortgage structure that better fits the homeowner's current finances and future plans.
Consolidate High-Interest Debt
Using available equity to eliminate expensive debt can sometimes create enough savings to justify the mortgage penalty.
Access Home Equity
A homeowner may need funds for renovations, investment, tax debt or another legitimate financing need before the mortgage matures.
Sell the Property
If the property is sold before maturity and the mortgage cannot be ported or otherwise preserved, the mortgage may need to be paid out early.
Switch Lenders
Moving to another lender before maturity may make sense when the complete financial benefit outweighs the cost of leaving the current mortgage.
Wait Until Maturity
If the penalty is too high relative to the benefit, waiting until the mortgage matures may be the more economical strategy.
Do Not Ask Only What the Penalty Is — Ask Whether Paying It Makes Financial Sense.
Before breaking a mortgage, get the lender's actual payout statement and compare the penalty and closing costs with the financial benefit of the change. Sometimes the penalty makes breaking the mortgage a bad decision. Other times, paying it can still leave you substantially better off.
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