Are you looking to buy a house or condo anytime soon? If you do not have enough savings to pay for a property in full upfront, then most likely you will needing a mortgage, more commonly known as housing loan.
But before you dive into this, it would be wise to get some information yourself before signing anything. Aside from us reminding you to read the small prints of your contract, we will learn from this edition of Lamudi Q&A an important thing you should discuss with your mortgage lender: pre-termination fees.
What exactly is a pre-termination fee?
A pre-termination fee is a fee imposed when the borrower wants to break from a long-term contract in a housing mortgage by paying out the balance before the loan matures. In other words, it is the total fee that a creditor will charge the debtor for an advance or a premature termination of a housing loan contract.
This pre-termination fee is normally (and should be) stipulated in the agreement made with the bank or creditor in which it also serves as an encouragement for the debtor to abide by the extent of the terms it made with the lender. Put simply, it is a fee you pay when you want to shorten the span of your payment terms.
For example, you have a five-year contract with your creditor and you want to shorten that contract to three years, you will need to pay an early termination fee to compensate for the interest the creditor could have gotten from the five-year contract. Basically, it is paying for the remaining interest of the two years from the five-year contract before its maturity.
In addition to this, pre-termination entails these two key parts: the pre-termination fee amount and the early termination fee rate.
The pre-termination fee amount is the amount that will be calculated at one point in the duration of the contract. It can either be a flat fee that is a fixed amount throughout the contract, or a declining fee that decreases as the contract matures; the pre-termination fee rate, in essence, is the rate the pre-termination fee decreases.
To name just a few, here are the most common reasons people break a term agreement:
- – Relocation
- – Separation/annulment
- – Job change
- – Health issues
- – Consolidating residences
- – Rate improvement
Lastly, pre-termination fees, home loan exit fees, early termination fees, and early termination penalties, are all pretty much the same thing; banks just use different terminologies for it so you have to look out for that. Again, what is important is to bring this topic up to your creditor before you sign an agreement. Not all banks, though, have a pre-termination fees, which you may either see as an advantage or not.
