Account Termination Fee: Importance, Calculation, and Avoidance

What Is an Account Termination Fee

An Account Termination Fee is a fee that may be charged if the mortgage buyer pays off the full amount of their home equity line of credit and terminates the credit line within the first 5 years of the agreement. Termination of the account must be done in full, and reducing the balance to zero does not count as termination.

KEY TAKEAWAYS

• Account termination fees are imposed by mortgage companies when a mortgage buyer cancels or terminates their mortgage contract before its expiration.
• The calculation of account termination fees varies and depends on the terms of the mortgage contract and the remaining contract period, but it can range from 1-3% of the remaining mortgage balance.
• To avoid account termination fees, it’s important to understand the terms of your mortgage contract and look for one that doesn’t include early termination fees or prepayment penalties. Negotiating with the mortgage company may also help lower or waive the fee.

Understanding an Account Termination Fee

This fee is designed to compensate the mortgage company for the costs incurred as a result of the termination. The amount of the fee varies depending on the mortgage company and the terms of the mortgage contract.

Reasons for Account Termination Fees in Mortgage Buying

Mortgage companies charge account termination fees to compensate for lost revenue and to cover their costs. These fees serve as a deterrent to discourage mortgage buyers from cancelling their mortgage contract, as the fees serve as a penalty for breaking the contract.

How Account Termination Fees are Calculated in Mortgage Buying

The calculation of account termination fees in mortgage buying depends on several factors, including the terms of the mortgage contract and the remaining contract period. Some mortgage companies use a flat fee, while others use a formula based on the remaining length of the contract and the mortgage interest rate. On average, account termination fees in mortgage buying range from 1-3% of the remaining mortgage balance, but the cost can be much higher for mortgages with high interest rates.

Understanding Prepayment Penalties in Mortgage Buying

Prepayment penalties refer to fees charged by mortgage companies when a mortgage buyer pays off their mortgage before the end of the contract term. These penalties are similar to account termination fees and are meant to compensate the mortgage company for lost revenue.

How to Avoid Account Termination Fees in Mortgage Buying

To avoid account termination fees in mortgage buying, it’s important to understand the terms of your mortgage contract before signing it. If you know that you may need to cancel your mortgage in the future, look for a contract that doesn’t include an early termination fee or a prepayment penalty. If you’re already in a mortgage contract and need to cancel, try negotiating with the mortgage company to lower or waive the fee.

Conclusion

Account termination fees in mortgage buying refer to fees imposed by mortgage companies when a mortgage buyer cancels or terminates their mortgage contract before its expiration. These fees are meant to compensate the mortgage company for its losses and discourage mortgage buyers from cancelling their contract. To avoid these fees, it’s important to understand the terms of your mortgage contract and look for a contract that doesn’t include early termination fees or prepayment penalties. If you’re already in a mortgage contract and need to cancel, try negotiating with the mortgage company to lower or waive the fee.