View Single Post
Old 10-17-2014, 03:06 PM   #6
The Fonz
Our Jessica Fletcher
 
Join Date: Dec 2004
Exp:
Default

In regards to IRD penalties, and how to claw back some of that cash:

When buying out your mortgage in it's entirety, make sure the bank is utilizing your 'Prepayment Privilege' that is written into your mortgage contract. Typically, you're allowed to pay off 15% of the original mortage principal per year, without penalty.

On a $450k original mortage principal, 15% equals $67,500. That's $67,500 that should be exempt from the banks Interest Rate Differential penalty, potentially saving you thousands. But it's not exempt, and they will penalize you, because they've written a loophole into the fineprint of your contract. It'll likely say something along the lines of "Prepayment privilege amount can not be paid on the same day as paying out the full mortgage amount" (but in bank speak). They write this rule in because most people don't have $67,500 lying around to utilize the privilege.... that is, until they sell that home for a profit, and only then do they have that kind of cash, the day they intend on closing the mortgage.

The way around it is very simple - Lets say you sell your $450k home, and the close date is Oct 29, this being the day your lawyer is to release the funds to your bank. What you have to do, is ask your lawyer to release the funds in 2 separate payments to the bank... 1 payment of $67,500 on Oct 29 (Prepayment Privilege), and 1 payment for $(remaining balance) on Oct 30. This separates the 'Prepayment Privilege' and the Mortgage Buyout Date by 1 day.

You will get penalized by the bank for paying the funds a day late though. In my case, they penalized me $21.20 for doing this. It saved me over $1900 in IRD penalties though.
The Fonz is online now   Reply With Quote
The Following 2 Users Say Thank You to The Fonz For This Useful Post: