You are about to enter a fixed term mortgage for 5 years at the current interest rate. You have been looking at the market and have found that in this time, your home will become worth less than what you owe. You think about fixing up the home or increasing its value by investing. However, if you fail to do so, you may end up falling behind on your mortgage payments. Now, you face a tough decision: do you sell now and risk losing money? Or do you wait it out and risk defaulting on your mortgage? Before making a decision, understand how the risks of selling your home during a fixed term mortgage work.
Fixed mortgages are a type of home loan that offers the borrower a set interest rate and fixed monthly payments for an agreed-upon term. The term length is typically 5, 7 or 10 years and provides stability in monthly payments and peace of mind in knowing that your interest rate won’t rise over time.
When you sign on to a fixed term mortgage, it is assumed that your home will increase in value during the course of the mortgage's duration. But what if it doesn’t? What if there is a sudden market shift and demand for your property falls off? You may be forced to sell your home now. Selling your home before the end of the mortgage contract may be risky for a few reasons.
First, you risk losing money. When you sell, you have to pay taxes on any profit or loss from the sale. If you don't make any money from the sale, then you're still obligated to pay off the remainder of your mortgage balance with no equity in your home. If you do make money from this transaction, then taxes will eat away at what you made. Second, you risk defaulting on your mortgage payments. If you can't make up for this difference in equity between what was owed and what was collected in the sale, then defaulting on your mortgage payment is likely. And finally, if it takes longer than 5 years to break even on a sale (which includes paying off both commissions and interest), then it might not be worth selling early just because of an increase in market value after 5 years.
So what should you do? Sell now or wait it out?
If you are on a fixed term mortgage and are considering selling, there are a few things to keep in mind.
- If you sell your home during your fixed term mortgage, the lender may require you to pay out any negative equity that has occurred. If you have negative equity, then the lender will charge you a penalty for paying this negative equity. This may hurt your ability to buy another property in the future.
- You will also need to pay closing costs when selling your home during a fixed term mortgage. These costs can be expensive, especially if you are trying to sell quickly and over list price.
- Selling your home during your fixed term mortgage will cause an increase in monthly payments if the new home is more expensive or if interest rates change after the sale of your old home.
- If you can make higher monthly payments when selling with a fixed term mortgage, it might be better to wait until the end of the term before selling. A higher monthly payment means less of an impact when interest rates rise because much of that extra money is going towards paying down debt rather than interest.
With a fixed term mortgage, you are not required to pay any more than what your monthly payments are. This means that for the duration of the mortgage, you will only have to come up with the monthly payment and nothing else. If you sell your home during a fixed term mortgage, you have several options:
- Sell your home and use this money to pay off the remaining balance on your mortgage
- Wait for the end of your fixed term and keep paying off the balance on your mortgage
- Sell some or all of your equity in order to break even and then proceed with one of the other options mentioned above
Depending on how much time is left on your fixed term mortgage, there may be an option that is more advantageous than others. While selling before getting into default is preferable, it's not always possible given certain circumstances. For example, if you were selling because you're moving out of state, it would be difficult to sell during a fixed term mortgage. Ultimately, when deciding whether or not to sell during a fixed term mortgage, consider your financial situation as well as the risks associated with each option.
Do you have a fixed mortgage?
A fixed mortgage is a loan that has a set interest rate and monthly payment for a specified amount of time. A fixed mortgage may be preferable for some people because it offers stability and predictability.
However, if you sell your home during the fixed mortgage term, you may lose some of the home equity that you’ve built up.
There are steps you can take to avoid this risk. If you’re considering selling your home during the term of your fixed mortgage, make sure to contact your lender about an early release of your loan. This can help you avoid risk and leverage the equity in your home.
