When you have "rate envy" does it make sense to refinance?
When you have "rate envy" does it make sense to refinance?
Who would have believed that mortgage rates would have such a continued downward trend? Mortgage shoppers are looking at some of the lowest rates in history, and many homeowners with existing fixed-term mortgages are experiencing some “rate envy” about today’s rock bottom rates.
It might be worth a conversation about your options. Typically, we think of a fixed term mortgage as a non-negotiable contract. And it’s true that there are financial penalties to re-negotiate. But, many clients have been asking for a mortgage analysis – a detailed look at the penalties versus the payoffs – to determine whether it’s worth refinancing.
Your existing mortgage
What does it cost to get out of your existing mortgage? Generally, you can expect to pay the greater of either a) three months’ interest, or b) the interest-rate differential. The interest rate differential can be high in some cases; your mortgage lender will expect you to pay them the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates.
Is it worth to get out of your present mortgage?
So is it worth it? For some homeowners it can be an important moment of opportunity, while for others, it may not be worth the costs involved. Most lenders will include the cost of the payout penalty and other costs into the new mortgage so you don’t have to be out of pocket to complete the transaction.
I would be happy to help you make a realistic assessment of your situation and help you determine if your benefit outweighs the cost. With rates where they are today, there’s never been a better time to talk.
Choose Mortgage Based on Prepayment Penalties!
Choose Mortgage Based on Prepayment Penalties: All things being equal, choose your mortgage with the best prepayment penalty
It’s impossible to plan on many of the things that will happen in our lives, like a job loss, illness, divorce, a personal matter, or even finding a better mortgage rate. There are many reasons why you may need to one day break your mortgage and renegotiate.
To break your mortgage, you can expect to pay a penalty
- the greater of either a) three months’ interest, or b) the interest-rate differential (IRD). With the IRD, your mortgage lender will want you to pay the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates.
Unfortunately not all lenders calculate the IRD the same way, and the differences can amount to thousands.
Calculate IRD
- To calculate IRD, many of our lenders take the difference between your contract rate and their current rate that most closely matches your remaining term. That calculation can lead to a reasonable payout penalty. However, a significantly higher penalty will result if the lender takes the difference between your contract rate and the posted rate that most closely matches your remaining term minus the discount you got on your original contract. That’s why professional advice is so important; we know which lenders have the most fair prepayment penalties.
If you are looking for a new mortgage, all things being equal like rate and privileges, be sure to take the prepayment penalty into consideration. If your circumstances change and you need to break your mortgage, having a fair prepayment penalty could save you thousands!
We are experts at providing the advice, education and resources that homebuyers and owners need. When it comes to mortgage penalties, it pays to be informed. And we’re here to help!
Call Kelly Wilson at 613 266-3570 at the Wilson Team, home of Canada's Top 1% Mortgage Team