The usual amount of penalty for the early payment of a mortgage is the higher of: Three months interest or the difference between the old loan rate and current loan rates, for the rest of the loan period.

HOWEVER'it is not always the case.

There are lenders, including the large mortgage lenders, who choose to calculate the rate difference in the way that is most beneficial to them, sort of creative financing. Instead of using the discounted rate that they used on the original loan, they will use the posted rate, which is usually the highest mortgage rate. This is the reason it is very important to get an estimate on prepayment penalties from your lender.

(NOTE: We inform you about all of this to remind you to pay attention and choose a good lender. An experienced broker can present your application to a lender who properly calculates the cost of the penalty.)

Different penalties for different products:

There is a different penalty for the various kinds of loan products:

? Open Mortgage Loan: these are the sole loans that do not have a penalty for early payment. The kinds of ?line of credit? mortgages are often open mortgages.
??Fixed closed mortgage loan: In general, the penalty is figured as the higher of either three months interest or the difference between the initial rate and the current rate, for the rest of the term of the loan.
??Fixed closed long term mortgage: Mortgages with maturities of 15 years and over, the penalty for
o For the beginning five years of the loan period, is the higher of either three months interest or the difference between the negotiated rate and the current rate, for the balance of the loan period.
o'After five years, it is only three months interest.
? Variable closed mortgage loan: Normally, three months interest but sometimes certain lenders only charge 2 months interest and others insist upon 6 months interest as a penalty.
? Mortgage loan ?5 in 1?: Some lenders prefer this type of mortgage; the penalty on a five in one home loan is usually 6 months interest.

Reimbursement of cash rebate

Some mortgage loans have a cash rebate aspect. It is not surprising that with a feature such as this, the rate will be higher, and you will have to pay back the cash rebate proportionately to the amount of time you have left on the mortgage contract when you break it.

Example: Your mortgage included a cash rebate of 4% of your mortgage for $200,000, or $8,000. If you repay the mortgage after 30 months (instead of the 60 months for a 5 year mortgage), you must repay a certain portion of this cash rebate. In this case, it is figured as 31/60th of the whole amount, which represents the 31 months difference between the 30th payment and the 60th payment. Therefore, $8,000 X 31, ? 60 = $4,133.33, which will be the amount of the reimbursement of the cash rebate.

And if you are thinking this amount is added to the other penalties, you are right. It can make the total penalties very expensive.

Why is there a penalty for early payment?

Most mortgage lenders sell the mortgages they originate in what is called the ?secondary market?. Groups of home loans are bundled together into groups of $100 million to $500 million and sold off to investors, who have the intentionof earning their return for the entire term of the loans. The lending institution still handles the administration of the loan.

If a home loan contract is paid down before its term is up (even if there is only a few weeks remaining) the lending institution has to handle the contract changes and repay the secondary market investors for the anticipated revenue that they counted upon and now will no longer receive, since the loan has been paid off. All of this additional work and expense means that the lender will pass along charges and a penalty.

There is an additional reason for these penalties and charges. Lenders don't like to lose clients, so they will make it difficult for you to walk away from your loan.