Payout Penalties
More and more I find that people are becoming more educated on how they can use their mortgage to their benefit. That means a lot of clients are seeing mortgage brokers about refinancing their mortgages. With refinancing however often times a client is charged a payout penalty to get out of their mortgage. Today's blog will discuss what payout penalties are and how anyone can calculate them.
What is a payout penalty?
A payout penalty is a fee that is charged when a client pays out, refinances, or sells their home before their term is up. These fees do not apply if the client is on an open mortgage. Payout penalties are often calculated in one of two ways. They are the following:
3 months interest:
This is an easy formula to calculate and often time the cheaper of the 2 options. It is simply calculated by this formula
Interest=Principle x Rate x Time
For example if a client had a balance of $100 000 on their mortgage and a rate of 3.99% the formula would look like the following:
Interest= $100 000 x .0399 x .25
Interest= $997.50
*Note: The time is expressed as 0.25 because 3 months is one quarter of a fiscal year.
Interest Rate Differential:
Interest Rate Differential is often the more expensive of the two options and is more complicated for mortgage brokers and the client to calculate. This calculation is based on your term and time you have left remaining in your term. If the same client that we used in the previous example had 3 years remaining in his term the payout penalty would look much different. The formula must be completed in 2 parts.
First you calculate the difference in interest rate that you have currently compared to the interest rate that is available for the same length of time left in the term so for example.
C= A - B
A= Current Interest Rate that client has on property
B= Best New Rates Available
This is based on length left on term. If a client has 30 months left in their mortgage term the lender would base their new rate on the best 3 year rate the client could get. The lender always takes the number of months remaining and rounds up to the next year. They then use the interest rate that would be given to a new client who signed up on that length of term.
C= is simply the difference between A and B
C= A - B
C= 3.99% - 3.20%
C= .79%
The Second Part of the formula works out as the following:
F= ({C x D}/12) x E
D= Remaining Balance on Mortgage
E= # of Months remaining in term
F= Payout Penalty
F= C x D/12 x E
F= ({.0079 x $100 000}/12) x 30
F= $1975
As stated before the second formula can be very confusing and it is often best to contact a mortgage broker as well as your mortgage company for an accurate payout statement.
What is a payout penalty?
A payout penalty is a fee that is charged when a client pays out, refinances, or sells their home before their term is up. These fees do not apply if the client is on an open mortgage. Payout penalties are often calculated in one of two ways. They are the following:
3 months interest:
This is an easy formula to calculate and often time the cheaper of the 2 options. It is simply calculated by this formula
Interest=Principle x Rate x Time
For example if a client had a balance of $100 000 on their mortgage and a rate of 3.99% the formula would look like the following:
Interest= $100 000 x .0399 x .25
Interest= $997.50
*Note: The time is expressed as 0.25 because 3 months is one quarter of a fiscal year.
Interest Rate Differential:
Interest Rate Differential is often the more expensive of the two options and is more complicated for mortgage brokers and the client to calculate. This calculation is based on your term and time you have left remaining in your term. If the same client that we used in the previous example had 3 years remaining in his term the payout penalty would look much different. The formula must be completed in 2 parts.
First you calculate the difference in interest rate that you have currently compared to the interest rate that is available for the same length of time left in the term so for example.
C= A - B
A= Current Interest Rate that client has on property
B= Best New Rates Available
This is based on length left on term. If a client has 30 months left in their mortgage term the lender would base their new rate on the best 3 year rate the client could get. The lender always takes the number of months remaining and rounds up to the next year. They then use the interest rate that would be given to a new client who signed up on that length of term.
C= is simply the difference between A and B
C= A - B
C= 3.99% - 3.20%
C= .79%
The Second Part of the formula works out as the following:
F= ({C x D}/12) x E
D= Remaining Balance on Mortgage
E= # of Months remaining in term
F= Payout Penalty
F= C x D/12 x E
F= ({.0079 x $100 000}/12) x 30
F= $1975
As stated before the second formula can be very confusing and it is often best to contact a mortgage broker as well as your mortgage company for an accurate payout statement.