Personal Finance

Dealing with the early redemption payment

For most people, a home of their own will be the biggest purchase, and the biggest debt, they will ever take on. For almost everyone, buying a home means taking out a mortgage, and in most cases that mortgage will remain in place for anywhere from 15 to 30 years.

Many people are uncomfortable with this decades long debt, however, and actively seek a way to pay it off. Of course, everyone dreams of buying that winning lottery ticket and getting rid of that mortgage, but sometimes other events, such as a good stock market investment or even an inheritance, allow the homeowner to eliminate the long term debt that a mortgage represents.

For those who find themselves in such a happy circumstance, however, there is one important consideration, and that is what is known in the mortgage industry as the early redemption payment or early redemption charge.

Some mortgage lenders write such an early redemption payment into the mortgage terms in order to protect themselves and ensure that they are able to recapture the money spent to underwrite and originate the mortgage loan.

If an early redemption payment does apply to the mortgage, it will only apply up to a certain date, so those planning to pay the mortgage early will need to determine what that date is by carefully reviewing the original mortgage paperwork. If the date is not far away, it may be a good idea to place the sudden windfall in a money market fund and wait for the early redemption penalty to expire.

It is also important to know that not all mortgages have an early redemption payment built in. Such early redemption fees are most common on adjustable rate mortgages, especially those that come with low initial “teaser” rates, or interest rates that are lower than the prevailing market rates. In this case, the early redemption payment is designed to stop homeowners from taking advantage of the extremely low interest rate and then paying off the mortgage before it can rise to market levels.

So if you find yourself flush with sudden cash from an inheritance, a smart investment, or the lottery, be sure to review your original mortgage paperwork carefully to see if you are subject to the early redemption payment. If the payment does not apply, it may be a great idea to get that long term debt off the books and start investing the money elsewhere.

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