Breaking a Mortgage: What You Should Know?
If you are a homeowner, odds are you have given some thought as to what that would entail and potentially cost you in terms of your current mortgage situation. The reality is that your mortgage is likely one of, if not the most complicated contracts that you have ever signed and if you aren’t careful you could end up owing $20,000 – if not more. Luckily, there are options, you just have to be smart about them, speak with professionals, and run the numbers. Read on, to learn about the right steps to take in order to break your mortgage, and not drain your bank account.
What Does It Even Mean to “Break My Mortgage?”
To put it simply, if you make the choice to depart from the repayment schedule you agreed to before the term is up, you are technically breaking your mortgage.
Figure Out What the Goal Is – Why Do You Want to Break Your Mortgage? Your first step is to decide what you want to accomplish. The majority of people are looking to accomplish one of three things: they want to reduce the total cost of their mortgage, they want to consolidate other debt (such as credit card debt) into their mortgage, or they want to reduce their monthly payments.
Understanding why you want to break your mortgage is vital as it will have a tremendous impact on how you move further ahead in this process. For example if you want to lower the total cost of your mortgage you have two options: you can keep your monthly payments the same, and shave years off your amortization period so you’ll own your home outright sooner, or You can keep the total length of the mortgage the same and reduce each monthly payment -either way, you will save money.
Figuring Out if You’re Even Allowed to Break Your Mortgage
In the majority of cases yes, you can technically break your mortgage. This is because when you sign your mortgage contract you agree to a number of conditions – one of which likely going to include a penalty for quitting your payment schedule prior to the term naturally ending (usually within one, three, or five years).
How Much Will It Cost Me to Break My Mortgage?
So now that we’ve established the fact that you are likely allowed to break your mortgage, it is time to figure out how much it is going to cost you. Whether you have a fixed or variable mortgage you are going to face a penalty of some sort – although penalties on variable mortgages tend to be significantly less.
- Breaking a Variable Mortgage
According to Canada’s National Housing Act, the penalty for variable-rate mortgages is equivalent to three months worth of interest. So, if you have a variable mortgage at 3.8% on 200,000 over a 25-year span your interest is $627 (on a $1,030 monthly payment). Multiply that $627 interest rate by three and you get your penalty of $1,881.
- Breaking a Fixed-Rate Mortgage
A fixed-rate mortgage generally comes with a higher penalty, and the penalty is generally more difficult to calculate without the help of a mortgage broker. Essentially this penalty is going to be based on the difference between the rate of your current mortgage and rate that the lender can get for their money, which is known as the interest rate differential.
Are There Any Other Costs to Consider?
Unfortunately, yes. Whether you decide to refinance, or break your mortgage to switch to a new one, isn’t much different from applying for your first mortgage. So you will still have to fill in an application and go through a credit check. You may also have to do a title search, there may also be appraisal as well as additional inspection fees. The process can be quite lengthy and expensive—it can cost you $1,000 or more.
If you’re planning on selling your house in the near future, it probably isn’t going to be worth it. You may barely break even – or worse you could even lose money due to the penalty and administrative costs. On the other hand, if you plan on staying put, refinancing can save you a bundle.
Finding the Best Rates for You
The idea of being able to walk into your regular bank and sign for the mortgage you qualify for – regardless of the details, simply out of ease and habit. However, unless you shop around how are you going to know if you are actually getting the best deal possible. In order to ensure that you are getting a great deal, it is important to speak with a mortgage broker. These are professionals trained to represent you, the borrower, in obtaining financing from a variety of lending sources. When hiring the services of a Mortgage Broker at the mortgage centre-Sky Financial, they will do the shopping for you saving you time and money. They work for you not the lenders
A Final Note
It is important to make sure you are actually allowed to take your mortgage elsewhere. In some mortgage contracts while you are allowed to break it you might be locked into resigning with your original lender. This is something to look out for on a new mortgage too. After all, it is better to go for a slightly higher rate than to be tied to one lender for the entire term.
The Mortgage Centre-Sky Financial