Have you ever wondered what happens to your mortgage when you decide to sell your home? Selling your home is a massive undertaking and what to do with your mortgage is just one of the many questions you have to ask yourself as a home owner when making preparations to move. You generally have four options in regards to what to do with your mortgage, depending on the type of mortgage you have, the terms and conditions, the current market, and what your prospective Buyers want to do. Continue reading to learn more about each option.
Pay it off
When you purchase your home and assume a mortgage contract, you will be paying it down over the years you live there, which in turn builds the equity of your home. Once it comes time to sell, ideally you will be selling your home for more than your current mortgage is worth. If you sell for above your mortgage amount, paying off the remainder of your mortgage may be the best decision for you. This, however, may not be the ideal solution if you have a relatively large amount still owing on your mortgage.
Paying off your mortgage is an option that only really works if you are in a specific position when selling. If you have what is known as an “open mortgage”, meaning you are not penalized for any pre-payments, paying off the balance may be the perfect option for you, especially if you only have a small amount remaining and are planning on assuming a new mortgage or not purchasing another home. It is important to carefully read the terms of your mortgage agreement to ensure that you do not incur extra of fees for breaking your contract before the term is up.
Porting your mortgage
A second option is to port your mortgage, which means transferring your existing mortgage to your new home with the same rate and terms. You can only port a mortgage if you are purchasing a new property at the same time as selling your current one. This is a fantastic option if mortgage rates are higher than your current rate is. Another advantage of porting your mortgage is that you are able to avoid the penalties that regularly come along with paying off or cancelling your mortgage agreement.
When you port your mortgage, you have the opportunity to adjust your mortgage to suit the purchase price of your new home. This means that you may be able to reduce your mortgage amount if you downsize or increase if you buy up. Increasing your mortgage when porting can be done in a few ways, one of which is by blending and extending your current mortgage to fit your new needs, or by adding on a second mortgage which will be subject to the current market fees and terms while leaving the original mortgage untouched (commonly done by banks). This would, however, mean that you have two mortgages with two different sets of terms, fees, and conditions.
This is not a one size fits all solution as not all mortgages are portable. For example, Variable Rate mortgages most likely will not be able to be ported, you cannot port a mortgage if the Buyers do not meet the requirements, and lenders usually have a time limit in which you can complete your port, which may not be within the closing date of your new home.
Buyer assumes your mortgage
A third option is for the new Buyer of your home to assume your mortgage. This means that the new Buyer of your home will take over your mortgage, rates, fees, and conditions. Although this option has fallen out of practice, with interest rates as low as they are now, it may make a comeback in certain situations. If you have an attractive mortgage plan, this may actually act as a selling point for your home. This is an especially attractive idea if you are not planning on purchasing a new home.
Although this sounds like a very attractive choice for a lot of home Sellers, there are some important points to keep in mind while weighing this option. The Buyer of your home has to qualify for your current mortgage to be able to assume it as well as pay out the remainder of the mortgage balance to you, the Seller.
This option does allow you as a homeowner to get out of your current contract without incurring any charges or penalties and begin a new contract if you are purchasing a new home. It is important to remember that, although you have been removed from the mortgage agreement itself, some lenders can still hold you responsible if the Buyers default on their loan up to 12 months after the agreement. Only after this 12 month period are you as the seller completely worry free.
Breaking your contract
When you break a mortgage agreement, you are likely going to have to make a hefty penalty payment. This may be a good choice if mortgage rates are lower now than the mortgage rate you are currently paying. The penalty fee may be worth the cost of the newer, lower rate you quality for. For example, if your penalty is $1,800 and you will save $5000 in interest payments by switching, it is a pretty easy decision to switch and pay the fee.
The cost of breaking your contract varies depending on the type of mortgage you have. If you have a Fixed Rate mortgage and chose to break that contract before the term is up, you will be charged an Interest Rate Differential (IRD), which is a fee calculated based on interest rates of your contract and current rates, which compensates your lender for the interest that they will not be able to collect. If you have a Variable Rate mortgage, you are in luck as this amount is both much lower and easier to calculate. It generally is a 3 months worth of interest fee that is charged.
Remember, your mortgage agreement is a complex legal document and any changes to it should be done only after alot of thought and talking to your lender about your options. If you are planning on selling your home and need some help, please do not hesitate to contact me!