Breaking Your Mortgage Early
today we're going to talk about breaking your mortgage early, why you might do this, and how penalties are calculated.
Why would you break your mortgage early?
You might sell your home. That's one reason to break or close your mortgage early.
You may be going through a marital separation, which would cause you to sell your property, or perhaps redo your mortgage to remove your ex spouse.
Perhaps interest rates have dropped and you want to capitalize on a lower interest rate. You might close your mortgage to get a lower interest rate.
There are many different reasons why somebody might break their mortgage, and in each case, you are going to pay a penalty to a lender. And it's important that you understand how they're calculated.
If you have a variable rate mortgage, that's the easiest to calculate. It's a simple three months interest penalty and is the lowest penalty on the market.
If you have a fixed rate mortgage it's calculated quite differently. It's called interest rate differential. And ultimately what it is is the lender compares the interest rate that you're paying them to, whatever the market interest rate is at the time you closed your mortgage and they calculate that based on the length of time remaining on your mortgage. So as an example, if you're paying 5% to the lender and when you need to close your mortgage, interest rates are now 3%. Well, that lender is losing 2% interest because you're closing your mortgage and they're going to loan that money to somebody else. And your penalty will be calculated based on that 2% loss to the lender.
However much time is remaining on your mortgage, the interest rate differential penalty calculation can be quite high, and it is different from lender to lender. So it's very important that you work with a mortgage professional who can set you up in the right product, who understands your future needs and potential things that may come up so that you are protected from those higher penalties that you can see.
That's it for now. Call our team if you have any questions.
