Avoid This Common Mortgage Mistake When Buying or Upgrading Your Home

When most people begin shopping for a new home, they focus on the headline-grabbing details: the purchase price, interest rates, and how much they can afford. While these are important factors, there is one often-overlooked detail that could lead to significant unexpected costs: mortgage penalties for breaking your current mortgage.

Whether you’re upsizing, downsizing, or simply relocating, the process of breaking a mortgage to purchase a new home can come with a hefty price tag. Understanding and preparing for these penalties can help you save tens of thousands of dollars. Here’s what you need to know.

Why Mortgage Penalties Matter

If you’re currently in a mortgage and need to break it before the term ends (for example, when selling your home to buy another), most lenders will charge you a penalty. These penalties can vary widely depending on your lender, the terms of your mortgage, and the time remaining on your mortgage contract. Unfortunately, many homeowners focus only on the current market rates when buying a new house and fail to consider the impact of these potential penalties.

Depending on the type of mortgage you have, the penalties can be substantial. In some cases, homeowners may be facing penalties in the range of $10,000 to $30,000—or even more.

How to Reduce or Avoid Penalties

1. Port Your Mortgage: If you’re moving to a new property but are staying with the same lender, you may have the option to port your mortgage. This means transferring the existing terms of your mortgage to the new property, which could save you from paying a penalty altogether. If you choose this route, it’s important to confirm with your lender that they will honor this option and whether any conditions apply.
2. Make Prepayments Strategically: Many mortgages allow you to make prepayments—extra payments made on top of your regular mortgage payment. If you know you may need to break your mortgage in the future, consider making prepayments in the same year or the year before you decide to sell. Some lenders allow prepayments of up to 20% of the principal balance each year without penalty. By taking advantage of this, you may be able to reduce your outstanding balance and, in turn, lower your penalty when you break the mortgage.

The Bottom Line

Mortgage penalties are an often-overlooked cost of buying or selling a home, but they can add up to tens of thousands of dollars. For homeowners planning to upgrade or downscale, it’s essential to understand the potential penalties you could face and how to mitigate them. Taking the time to consider your mortgage terms and prepayment options now can lead to substantial savings later.

Before you start shopping for your next home, reach out to your lender or a mortgage broker who can help you understand your current mortgage's terms and options. By factoring these costs into your planning, you’ll be in a better position to make informed financial decisions and potentially save $10,000 to $30,000.

Don't overlook this critical piece of the puzzle. It could make a world of difference in your home buying journey.