Is breaking your mortgage term to secure a lower rate a good idea?

If you are a home owner and have been following recent interest rate trends, you have likely noticed that mortgage rates are on the decline. If current rates are lower than the rate you have, should you break your mortgage term early to try to secure a new rate? Most people know that breaking your mortgage term early results in prepayment penalties, but they may not be aware just how significant these can be. It’s important to understand how much you might owe before you decide to break your term and refinance. Here are the main points to know.

The different kinds of prepayment penalties

Breaking your mortgage term will result in a prepayment penalty. However, the size of this penalty can vary. It can either be the equivalent of three months’ interest, or what is called the interest rate differential (IRD). the IRD is the difference between current posted rate, and the rate you secured when you signed your mortgage. If you signed a mortgage with a six per cent interest rate, for example, and rates dropped to three per cent, the IRD would be calculated on a three per cent difference. The IRD exists to provide reassurance to lenders that they will not suffer major losses if their borrowers refinance. 

While it is easy enough to calculate three months’ interest, working out an IRD penalty can be more complicated. Unfortunately, borrowers often underestimate the cost of this penalty, and end up owing more in fees than they can save from refinancing.

Is it worth it to refinance?

In order to determine if breaking your mortgage term is worth it, you need to understand the costs you would be facing compared with the amount you could save. In some cases, borrowers could save much more than they would owe. This is especially true with variable-rate products, which tend to have more flexibility when it comes to breaking a term early. Fixed-rate products are more rigid with their rules, which means breaking your term before it is up for renewal can be quite expensive. 

You should think about a couple of factors when making this decision. First, consider how much time you have left in your current term. The sooner your term ends, the less time you have to benefit from a refinance. Second, you should examine the trends to see if rates are expected to fall even further. If so, you might want to wait before refinancing.

How a mortgage broker can help

Of course, the best way to ensure you are making the right decision is to work with a mortgage broker. Interest rates and prepayment penalties can be confusing, and you should have a professional on your side who can help you make the best choice. We can compare the potential savings with what you might owe to see if breaking your term early is worth it. We can also discuss the future of mortgage rates, and whether you should act now or hold off. The most important thing we can do is help you understand your situation and be transparent about the process. If you are considering refinancing your mortgage, be sure to reach out to us first! 

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.