You are locked in at a decent interest rate for the next four years, but your mortgage advisor notifies you of an incredible variable rate mortgage product that just became available. After crunching the numbers, you find out that you can save $200 on your monthly mortgage payment and pay off your mortgage faster. Sounds like a no-brainer, but we recommend you answer the following questions to be sure that breaking your mortgage is in your best interest.
What is your goal?
Your first step is to decide what the main goal of breaking your mortgage is. Are you looking to reduce your monthly payment? Are you trying to consolidate some of your debts into a new mortgage? Do you want to pay off your mortgage faster? Depending on what your goal is, breaking your mortgage may not be worth it, or it may be the smartest financial decision of your life.
Is breaking your mortgage worth it?
Because the rates are so low now in 2016, it may be worth switching your mortgage even if it’s for a small drop in interest rate. For example, if you are locked into a fixed rate of 4% and are eyeing a new rate of 3%, the difference is 25%. Your monthly mortgage payment could be reduced by an equivalent amount. If your goal is to reduce your monthly payment, this will accomplish that. On the other hand, you must weigh the reduction against penalties and (possible) a longer mortgage term.
Can you break your mortgage?
In most cases you will be able to break your mortgage. You need to look over your paperwork (or ask your lender directly) to be sure. There is likely a penalty that you will need to pay for breaking your mortgage early. Speak with your mortgage advisor and they will guide you through your options.
How much will breaking your mortgage cost?
The penalty for breaking a fixed-rate mortgage is different than that of a variable-rate mortgage, with the latter costing much less. The penalty for variable mortgages is typically equal to three months’ worth of interest. The penalty for fixed mortgages is complicated to calculate on your own. Contact your mortgage advisor for help with calculating the exact costs of breaking your mortgage.
You should consult a mortgage advisor before breaking your mortgage. A mortgage will probably be the most intricate contract you will sign and there are a lot of moving parts involved in the process. At The Mortgage Advisors, we can walk you through your mortgage and determine the mortgage solution to achieve your short-term and long-term financial objectives.