When buying a home, you may commit to a long mortgage term, but with an intention to resell your home after a short while due to some reason. For instance, you can sign up for a a 5-year mortgage term but after 2 years you decide to resell the home. What happens and what should you do?
In such a situation, there are 3 actions you can take depending on a number of factors. The 3 options include:
- Porting a mortgage.
- Breaking a mortgage.
- Assuming a mortgage.
Below is a description of each of the 3 options and the limitations of each option you may decide to take.
Porting a Mortgage
What is porting? Porting a mortgage in simple terms means the transfer of a mortgage from one property to another. The portable mortgage is transferred with its current rates and terms. Porting a mortgage is only possible when you are selling your old home to buy a new home at the same time. If you have a bigger mortgage for the new home, you can discuss with your lender to extend and blend your current mortgage.
Why and when can you port a mortgage? If the existing mortgage rate is lower than the rates available in the market, you should consider porting your mortgage. This option will also help you to evade any prepayment penalties. If your (the home seller’s) current mortgage rate is greater than the lowest rate in the market as of now, you should calculate to see if the advance payment penalty outweighs the lowest rates you qualify for.
However, some mortgages are not portable e.g. most of the variable rate mortgages. Also, some lenders offer between 30 and 120 days for the porting process to complete. You may not have enough time if your closing date for the old or new home falls outside this period. Before shopping for the next new home, it is advisable to consult your mortgage broker on the most viable option.
Assuming Your Mortgage
Assuming your mortgage simply means shifting your present mortgage balance to the home buyer. This is the best option when you are reselling your home with no plans of buying a new home. It is also applicable if the existing mortgage rate is lower than the current market rates. Assuming your mortgage can be used as a tool to attract more buyers.
The buyer will be required to pay for the difference between the buying price and the mortgage. Let’s take an example when selling your home for $500,000 and the mortgage balance is $300,000, the home buyer will assume the mortgage and then pay the difference of $200,000.
As the seller, before allowing the buyer to assume the mortgage, you need to consider two things:
- Can the buyer qualify for the financing of the mortgage?
- Whether all your responsibilities will be transferred from your mortgage loan agreement.
This is because the lender still holds you responsible in case of default on the mortgage loan until after consecutive payment for at least 12 months.