Mortgage penalties are a necessary evil and should be closely scrutinized when negotiating your next mortgage. Choosing a mortgage solely based on the interest rate could cost you over $12,000 in future penalties overshadowing any interest savings.
Forced to comply with new federal regulations, mortgage companies must now fully disclose their penalty formulas and must provide an on-line penalty calculator. It would be worth your while to submit your mortgage scenario to several mortgage companies to see the difference.
Here are the pay-out penalties associated with a $300,000 mortgage 2 years into a 5 year fixed rate term at 2.99%
Although there are modest differences between the bank’s you’ll notice a savings of over $12,000 by working with a non bank mortgage company. The reason for this massive difference is that all the banks use a similar interest rate differential formula. That is, they take the discount you received on your original 5 year term and apply it to the posted mortgage rate of the term nearest to the time remaining on your mortgage. The non bank lenders on the other hand simply compare your actual mortgage rate with the mortgage rate of a term nearest the time remaining on your mortgage.
The non bank lenders are calculating the true interest rate differential they are losing by the pay-out. The banks on the other hand are making a cash grab.
Unless you are certain that you’ll pay off your mortgage without moving, selling, or ever needing a refinance then take heed of the dreaded mortgage penalty. It will creep into the equation and make that cheap mortgage rate very expensive.