Life doesn’t always go according to plan, and sometimes your mortgage no longer fits with your personal finances. As a result, you might want to break the contract and pay the remaining balance entirely without financial institutions looking to make a financial gain of your interest.
When you signed your mortgage contract, you also agreed to conditions that grant your lender legal leverage over you. However, you can still break the contract and get out of a mortgage without or with minimal penalty.
North Carolina Mortgage Laws
North Carolina law recognizes mortgage loans as loans made to a natural person (in this case borrower) for personal, family, or household use, primarily secured by mortgage or deed of trust on residential property located in NC.
A borrower may be an individual, a partnership, LLCs, corporations, associations, and other groups engaged in joint business activities. The loan has to be issued by a qualified mortgage lender, either a loan officer, mortgage banker or a broker registered with the state.
A loan has to be granted upon agreed mortgage terms, like mortgage interest rates, monthly mortgage payments, and mortgage prepayment penalties in case of lump-sum repayment or refinancing. Additional payments, such as closing costs and transfer of funds and loan amount to the borrower’s checking account, must also be disclosed before they’re applied.
Repayment Penalties in North Carolina
Mortgages usually come in 15 or 30-year terms, and homeowners often plan to repay their mortgage early and save hundreds, if not thousands, on mortgage rates. However, repaying your mortgage before time prevents your lender from collecting interest from you, which is why many contracts include prepayment penalties.
What Are Prepayment Penalties?
A prepayment penalty is a fee assigned if you repay your existing mortgage monthly payments in a lump sum, all at once. These penalties also apply to other situations, including home sales or refinancing of a home. In addition, since mortgage lenders can’t collect any additional interest payments, payment penalties exist to protect and reimburse lenders for the amount of interest income lost.
How Much Is a Prepayment Penalty?
A prepayment penalty can be a part of your mortgage contract. As such, lenders are legally obliged to disclose when a prepayment penalty is written into your contract.
The actual costs of prepayment penalties vary from lender to lender, but they might be set as lump sums or a percentage of your principal balance remaining on your mortgage loan at the time of assessment.
It’s worth noting that prepayment penalties aren’t as common as they used to be, as they’ve fallen out of favor as the housing market increased. However, it’s still worth asking your lender about any prepayment penalties, especially if you’re interested in paying off your mortgage faster than stipulated in your contract.
Are They Beneficial to Borrowers?
Prepayment penalties can be extremely beneficial for homebuyers looking for a home loan. For example, accepting a prepayment penalty allows mortgage lenders to offer you lower interest rates and variable rates in some cases.
Unlike fixed-rate mortgages, which don’t affect the amount of your month’s interest, variable rates can actually decrease the amount of interest you would have to pay over your loan term. Another benefit of accepting prepayment penalties is that they allow lenders to help high-risk borrowers suffering from a poor or non-existent credit score.
Mortgage Penalties and Fees
Each lender is legally required to disclose the type of mortgage rates, whether they’re fixed or variable, and if there are any prepayment penalties associated with your loan. However, lenders are equally obliged to disclose any fees associated with requesting, processing, and closing a loan.
Inquire at your mortgage lender about whether your interest rates are fixed or variable. Keep in mind that this might incur additional costs if the interest rates increase. It’s always a good idea to ask about the annual percentage rate (APR) on your loan, which includes interest points, broker fees, and extra payments that may be required, shown as the year mortgage rate.
points are fees paid to the loan lender or broker and are often linked to interest rate, and the more points you pay, the lower the rate. However, if your points are non-monetary numerical values, ask your lender to elaborate just how much you’d have to pay in dollars.
Broker fees, origination fees, and closing costs are just some of the additional fees paid when you apply for the loan and when you close it. Per federal law, all borrowers are entitled to a written “good faith estimate” of all fees and additional costs shortly after applying.
It’s important to remember that you’re borrowing money, and some of these fees may add up to the principal loan balance.
Ways to Get Out of a Mortgage Without a Penalty in North Carolina
The COVID-19 pandemic has undeniably caused financial hardships for millions of Americans due to the pandemic-related income loss. This posed a severe issue for homeowners on a mortgage payment schedule, as most of them didn’t have the extra money to cover their monthly payments.
Luckily, the U.S. government declared mortgage forbearance, which allowed homeowners to temporarily halt their current mortgage payments for as long as 15 months without incurring any additional penalties or fees. Unfortunately, for approximately 4% of homeowners, that wasn’t enough.
Job loss, divorce, retirement, medical bills, or too much credit card debt can prompt homeowners to get out from underneath their mortgage without paying the penalty. Here’s how to avoid mortgage paying trouble:
The Strategic Default Way
A good business rule is to cut off unnecessary losses and bad investments. When your home has become a bad investment, you should consider a strategic default.
Unlike regular defaults, which usually happen due to a poor financial situation, strategic defaults mean purposeful defaulting on your loan, even if you could afford to stay current on your loan. This causes the bank to foreclose your property, adversely affecting your credit and further business endeavors.
However, you could ask the bank or lender to refinance your loan and make it more affordable. Additionally, there are better alternatives to strategic default, like a deed in lieu of foreclosure, which grants the bank ownership over your property. Short sales are also an option.
Consider a Short Sale
Short sales involve selling your real estate for a lower price than the remaining mortgage balance and well under the property’s market value. For example, if there’s $170,000 remaining on your mortgage, you can initiate a short sale and sell your property for $150,000. When the deal finalizes, homebuyers get their new home, and the sales proceeds go towards covering your debt.
Considering that the lender stands to lose money on short sales, all short sales must be pre-approved by the lender. Short sales can’t occur without the lender’s approval, which consists of written and notarized elaboration and justification of the short sale.
It’s worth mentioning that they’re very different from any kind of foreclosure, and banks and lenders usually tend to look favorably upon short sales, considering the viable business decisions.
Consider Renting Your House Out
Before taking your board with “buy my house North Carolina” written all over to promote your home sale in front of a local supermarket, you might want to consider renting your house out.
Depending on your location and rent rates, you can rent your home for enough money to cover the mortgage payment. This option is viable in a strong rental market, doesn’t require any repairs to your home or lender’s approval, and allows you to remain a homeowner.
The downsides are that you’re just eliminating mortgage payments and not the mortgage itself, and you’re still required to find another place to live. Ensure that you make a rental contract with your tenants and ask for a security deposit to cover any intentional damage to your property caused by bad tenants.
It also gives you legal grounds to pursue them through the court if they’re behind on rent payments and decide to leave without paying.
There are several ways of getting out of a mortgage without incurring penalties. However, walking away from your mortgage or employing a strategic default method is the most undesirable way that could severely impact your credit score and impose difficulties in obtaining future loans.
Renting your home to cover mortgage payments has certain downsides, but at least it allows you to stay current on your mortgage and remain the homeowner of your property.
Short sales are an option in-between. Not quite as radical as strategic foreclosures, short sales don’t affect your credit score by more than 50 to 100 points. If you’re interested in short-selling your home, contact Tiffany Home Investments, cash home buyers Belmont taxpayers turn to for fast short sales and cash payments.