In this special episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard…
We talk a lot about getting approved for a mortgage, buying a home, and securing the right product and rate. But what happens if somewhere down the line, you need to break your mortgage terms? After all, the journey of becoming a home owner doesn’t end when you move into your house. Years later, there are still obstacles to navigate and decisions to make. If you think your mortgage isn’t working for you anymore and you need to break away, you should expect to pay the price.
Here’s what you need to know about breaking your mortgage terms, and the fees that come along with it.
Reasons why you might break your mortgage
You can secure a lower interest rate
If interest rates today are lower than they were when you locked into your mortgage, you might be able to save money in mortgage payments by refinancing to a lower interest rate. By paying less interest, you’ll lower your monthly payments and increase your monthly cash flow. As long as the savings long-term are worth the penalty you’ll pay for breaking your mortgage terms, this can be a good reason to make that move. Just do some calculations to make sure you’ll make up for what you’ll lose in fees!
You plan to move
If you have plans to move to a different home, you’ll most likely need to break your mortgage terms when you sell your house. Maybe you’re moving to a bigger or smaller home, or to a different area, or to save money. No matter what your reason is for moving, the most important thing is to have a home that suits your needs.
Your finances have changed
Maybe you’ve experienced a loss in income, and need different mortgage terms so you can spread out your payments over a longer period of time. It’s also possible you want to pay off your mortgage early, so you want to change your terms to allow for prepayments or bigger payments. Our financial situations can change quickly, and in these cases, breaking your mortgage terms might be the best option.
Breaking your mortgage contract early means you’ll be charged a prepayment penalty. This is a fee from your lender meant to make up for the loss in interest payments they’ll experience from you breaking your terms. These penalties can vary depending on many factors. While most lenders and banks calculate their fees differently, there are a few things that will be standard across the industry.
Open vs. closed mortgages
If you have an open mortgage, you’re able to break your contract without facing any penalties. This flexibility is an advantage that comes with this mortgage type, but it also has way higher interest rates in exchange. Closed mortgages don’t have nearly as much flexibility with prepayments or breaking terms, and this is when you’d face a penalty. However, the lower interest rates generally make closed mortgages more popular.
How are prepayment penalties calculated with fixed-rate mortgages? You will have to pay the greater amount between three months’ interest, or what is called an interest rate differential (IRD). Lenders calculate this by taking the remaining time left in your contract, your mortgage rate, and what the interest rate would be for someone signing your mortgage contract today. They subtract today’s rates from the rates that existed when you signed, and multiply that percentage by the remaining amount left on your mortgage. Between that number and whatever three months’ interest adds up to, you’ll pay the bigger amount for breaking your mortgage terms.
The penalties on a variable-rate mortgage aren’t as complicated. The fee for breaking your terms is always three months’ interest from your current mortgage. These penalties are often cheaper than fixed-rate penalties, but it depends on your interest rate and how much time is left in your contract. In both cases, the fees can be thousands of dollars.
There might be additional costs to pay as well. These can include reinvestment fees, administration fees, and appraisal fees. These are extra, smaller fees from the lender to deal with the process of ending your mortgage. These can each cost a few hundred dollars, so they’re important to remember when considering the costs of breaking your terms.
Breaking your mortgage terms might be the best move for you, but you should still expect to pay for that freedom. You also need to carefully consider how this action will affect your finances and your future before you commit to it. If you’re not sure whether you should break your mortgage contract, we recommend getting in touch with an unbiased mortgage broker! We can help you decide what your best move is, and how you can accomplish your financial goals.
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.