If you feel the urge to get out of your mortgage early, you are not alone. Most people want to prepay their mortgage loans, so they do not stress about monthly payments any longer.
For some, this means using an inheritance, pay raise, or savings to clear their debt. This is often a wise financial decision. However, it is not always easy because some mortgages have hidden fees such as prepayment penalties.
A prepayment penalty is a fine charged if you decide to pay off your loan sooner than your payment schedule dictates. You do not have to pay the penalty for an early mortgage loan repayment.
Below are some tips on how to get out of a mortgage without a penalty.
Nebraska Mortgage Laws
Various laws in Nebraska govern the mortgaging processes. These policies include rules applicable, fees authorized, pre-authorized loans, reverse-mortgage loans, abandonment, etc.
Reverse Mortgage Loan
A reverse mortgage loan means a loan that
- It is secured by residential real estate.
- Gives a borrower cash advances based on their owner-occupied principal residence
- Requires no payment of a principal or interest amount until the loan becomes due and payable
Mortgage Penalty Laws
A prepayment penalty is a fee for the early payment of a mortgage. Such a mortgage penalty should not exceed six months’ interest on 80% of the principal balance.
Forced Sale
In a forced sale of a debtor’s real property or assets, any proceeds that exceed the claims of creditors should be retained by the debtor.
General Interest Rates
Any rate of interest which may be agreed on, not exceeding 16% per annum on the unpaid principal, is valid on any loan or forbearance of goods, money, or items in action. Such a rate is reasonable except as provided in section 45-101.04.
Foreclosures
A foreclosure is when the servicer decides to repossess the mortgaged property due to mortgage delinquency. The law requires that a creditor wait until a loan is over 120 days delinquent before starting a foreclosure.
Mortgage Tax
There is no mortgage tax charged in Nebraska.
Cancellation/Commitment Fee
Nebraska requires payment of a cancellation fee if records show that the committee has already been acted upon by the recordation of a mortgage, deed, or other instruments.
Deeds
The types of deeds customary to commercial and residential transactions include special warranty deeds, personal representatives, general warranty, joint tenancy warranty, corporation warranty, and quitclaim deeds.
Repayment Penalties
A mortgage prepayment penalty is charged once you decide to pay off your principal balance earlier than your contract indicates. It is also known as a payoff penalty and is usually equal to a certain percentage of the total unpaid balance.
Most borrowers are not subject to prepayment penalties today. Moreover, some states do not allow lenders to charge prepayment penalties.
However, it is crucial to check with your financier if they charge a penalty if you try to sell your home to companies that buy houses in Nebraska or clear your loan early.
Lenders use prepayment penalties to encourage people to keep the loan for longer than just one or two years. This way, they can earn more interest and consequently more money.
A prepayment penalty shall only be allowed under Nebraska mortgage laws if
- The maximum liability to be assessed is expressed in writing when the debtor signed for a mortgage.
- The loan is paid fully within two years since you took the loan.
- A debtor repays the loan with monies other than the proceeds of a different loan made by the same licensee.
Prepayment Penalty Cost
There are a few factors considered in the determination of how much a prepayment penalty would cost.
Some lenders settle on a small percentage of the remaining loan balance. Other lenders resort to the cost of interest on the loan for a given number of months.
The penalty charged might be 2% of the loan balance within the first two years or 1% by the third year. For instance, let us assume you would like to sell your home in the second year after taking a mortgage loan.
Supposing the remaining loan balance is $400,000, at closing, you may be charged an $8,000 penalty at a 2% rate.
Mortgage Penalties
Mortgage penalties are associated with non-conforming mortgages – loans not insured or sold by government-sponsored enterprises like Freddie Mac. They are, however, not applicable to conventional VA, USDA, or FHA loans.
There are only two types of mortgage prepayment penalties:
- Hard prepayment penalty – This penalty is due when you refinance or sell your home. You may be liable to pay a fee if you try to pay off more than 20% of the remaining loan at any time.
- Soft prepayment penalty – It is due to debtors who decide to refinance your home. It conforms to the rates found in the loan documents.
Now that you know what causes the prepayment penalty, you must be wondering “how to get out of a mortgage without a penalty.” Here is how to get out of a mortgage legally without any penalties
Ways to Get Out of a Mortgage Without a Penalty
The best way to avoid a mortgage penalty is to avoid loans that impose this charge. However, if you got into a deal without knowing they impose a prepayment penalty, here is how to get out of the mortgage without paying any penalties.
The Strategic Default Way
A strategic default is an intentional decision by a mortgage debtor to stop making payment obligations to the creditor.
This method is often best for mortgage holders of commercial and residential property after analyzing the costs and benefits of defaulting against continuing to make payments. Typically, they find it better or more beneficial to default.
The prevailing market conditions influence this decision since the property’s value is less than the amount due to the creditor (mortgage). Instead of waiting for prevailing conditions to change, the mortgagee walks away from the debt.
It is often the last resort for debtors in distress. Unfortunately, you may have a bad credit rating for walking away from your debt.
Walking away from Your Mortgage
If you no longer feel like paying for a mortgage, walk away from it. Walking away is more like believing that the challenging situation you are in cannot get any better and must be accepted.
If you opt to walk away, you stop making the monthly premiums towards your mortgage financing. Investors decide to walk away from a mortgage since continuing to pay for it does not seem economically viable.
Typically, the situation occurs when a lender overcharges for a property or the market conditions change, rendering your investment valueless. This can also happen if no appraisal to determine the actual market value is done before buying a property.
We buy homes in Hickman to help you get rid of your mortgage penalties without any hustle.
Consider a Short Sale
Short sales typically occur when a borrower or homeowner is in a financial crisis, and they resort to selling their home for a price below the market level. They are often safer alternatives than foreclosures for both mortgagor and mortgagee.
The lender gets all the proceeds once you sell your house fast online and either obtain a deficiency judgment or let go of the deficit amount. Short sales can be beneficial for all parties, including buyers and sellers.
Sellers prevent foreclosure, pay off their mortgage debt fast, and maybe be forgiven for the remaining debt. Buyers get a discounted price for the property since the seller’s motivation is to close a deal quickly and pay off their debt.
Cash home buyers Lincoln can help you close a short sale faster for instant cash if you cannot find a buyer.
Consider Renting Your House Out
If the housing market is unfavorable and takes too long to find a buyer, there is another option. The best way out is to rent out part or the entire house. It would help you cover some of the mortgage costs.
However, these practices are vital as they would help protect your investment:
- Find a good tenant – background checks, your instincts, and client history often help.
- Determine prevailing market rents – find a professional valuer for an appraisal.
- Come up with a lease agreement to protect your rights.
Conclusion
If you follow these tips, you will get out of a mortgage without a penalty. Find the tip that suits you, and do not forget to weigh the pros of each against the cons.
If you do not intend on taking another loan, tanking your credit score by walking away or defaulting the loan may work for you. However, if you want to preserve your credit score, consider other methods like renting out or short sale.
Element Home Buyers is here to help you make a fast and effortless home sale to clear your mortgage prepayment without any penalties. Reach out to us to get a cash offer now or if you still have questions about avoiding prepayment penalties.