What is the purpose of a due-on-sale clause in a mortgage?

A due-on-sale clause is a provision commonly included in mortgage agreements that protects the lender’s interests when the property is sold. The primary purpose of this clause is to allow the lender to demand full repayment of the loan if the borrower sells the property. This means that if the borrower decides to transfer ownership of the property to another party, the lender has the right to require that the remaining balance of the mortgage be paid off in full, rather than allowing the new owner to assume the existing mortgage under the same terms.

This clause is particularly important for lenders as it prevents a situation where a low-rate mortgage is transferred to a new buyer who may not be subject to the same lending standards, potentially increasing the lender’s risk. By including a due-on-sale clause, lenders maintain control over who is responsible for the debt and can make adjustments based on current market conditions or creditworthiness of potential new borrowers.

The other options do not accurately describe the function of a due-on-sale clause. For example, refinancing is unrelated to the transfer of property, and this clause does not guarantee a fixed interest rate or lower monthly payments, as those aspects typically depend on the initial mortgage terms and negotiation.