The (Almost) Perfect Mortgage
The perfect mortgage is, of course, no mortgage at all! But the next best thing is to have one flexible enough to pay off the principal as fast as possible.
All mortgages are structured so payments in the early years are primarily interest charges: Very little principal is shaved off unless you make sure payments are high enough and frequent enough that a good chunk -- perhaps 50 per cent rather than the usual five per cent or 10 per cent -- is going straight to the principal.
Taking advantage of annual prepayment options, usually 10 per cent or 15 per cent of principal, is another way to chop years off an amortization schedule and save tens of thousands of dollars in interest payments.
Couple this approach with interest rates hovering near generational lows, and home buyers have a real opportunity right now: Someone taking out a fixed-rate mortgage may be paying as little as 3.69 per cent in interest, which means even more of the monthly payments will be whittling down the principal.
To Refinance or Not to Refinance...
But what about those who committed to fixed-rate mortgages when rates were higher? It may now be worth their while to break the existing mortgage and refinance.
You should know that homeowners have no legal right to break the contract. If you have a 10-year mortgage, after five years you can break it by paying a penalty of three months' interest.
However, for mortgages of less than five years, there's no law saying the homeowner has the right to pay off the mortgage and refinance under more favourable terms.
Don't Sweat the Penalty
At most institutions, the penalty is the greater of three months' interest or the interest rate differential (IRD). The latter is the difference between the higher rate you had originally agreed to pay and the lower rate institutions would now be able to charge by lending the same capital to someone else.
A deal's a deal, after all, and the lender would lose a bundle by letting you off the hook.
Even so, refinancing now could save homeowners thousands.
Don't be put off by what looks like a big penalty. It's only one factor, and these penalties can be rolled into a new mortgage so you don't have to come up with the cash.
Leslie Lee is a mortgage broker with CENTURY 21 Heritage House Ltd. based in Tillsonburg, ON.
(Are you considering refinancing your mortgage? If so, have you looked into "green mortgages"?)
Posted by Leslie Lee
on August 27, 2009