Breaking Your Mortgage Can Save You Money in the Long Run
Mortgage rates are hovering near historic lows and for the first time in many years, the rate variance between variable and fixed mortgages is negligible. To see just how rates have changed, check this fun fact out:
- In 1981, the prime rate was 22.75%! If you had a $300,000 mortgage and an amortization of 25 years, your monthly payments would've have been $5460.28
- The 2011 Prime Rate was 3.00%. If you have a $300,000 mortgage now with an amortization of 25 years, your monthly payments would only be $1419.74.
What a difference three decades make! So with rates this low, chances are you’ve considered breaking your current mortgage and renewing now before rates go up again.
In some cases, breaking your mortgage could save you thousands of dollars in the long run. How nice would it be to pay 3% instead of 5% on your mortgage? Wouldn’t it be better to put that amount towards reducing your mortgage principal?
On the other hand, the penalty fees could end up costing you more for breaking your mortgage. In some cases, the penalty can be quite substantial if you aren’t very far into your mortgage term. A common assumption is that the penalty for breaking a mortgage amounts to three months’ interest payments so, when you crunch the numbers, it doesn’t seem so bad. In most cases, however, the penalty is the greater of three months’ interest or the interest rate differential (IRD).
The IRD is the difference between the interest rate on your mortgage contract and the rate that the lender can charge today when relending the money. Since interest rates are at their historical low, the IRD penalty tends to be greater than three months’ interest.
Keep in mind, however, that penalties vary depending on your lender and the type of mortgage you have. In addition, the size of your down payment and whether you opted for a “cash back” mortgage can influence penalties as well.
The name of the game is saving money in the long run. It's become very evident that interest rates will be on their way back up, which means mortgage rates will also be trending up again. The goal now is to secure a long-term rate commitment before it is too late, and here lies the significant future savings.
A mortgage specialist will give you a good idea if breaking your mortgage is right for you. Give me a call and I'd be happy to refer you to one in your area.