Break a Mortgage for a Lower Rate?
Break a mortgage for a lower rate seems like a great concept, and it usually always is. Reducing the interest rate on your mortgage, loan, line of credit, or any other credit facility will keep more money in your pocket. While a lower rate is very attractive sight and thought, it is most important to analyze all factors and costs to truly understand the math.
Firstly, you’ll want to ascertain that you truly qualify for the interest rate that you saw being advertised. Typically rate advertisements will show starting rates, and in most cases, these rates are for insured mortgages. This means that if you are looking to purchase a property that is worth over $1M, or looking to refinance, the insured rates are not applicable. You would then need to ascertain the rate offering for what is known as a conventional mortgage.
Secondly, you must understand if you will be subjected to a prepayment penalty. In most cases, mortgage prepayment penalties are usually the greater of 3 months interest and the interest rate differential. You can easily calculate a 3-month interest penalty by multiplying the principal balance by the interest rate, and then divide this figure by 12 and then multiply by 3.
The interest rate differential is based on your current rate, and the interest rate currently available for a new mortgage term, similar to the remaining length of your existing mortgage term. To make matters more a complicated, different mortgage lenders use different formulas to arrive at their interest rate differential penalty. The banks will usually base their calculation off of their post-rates, whereas broker friendly mortgage lenders might use their actual posted or contract rates. The latter is much more borrower-friendly.
Say that your existing $400K mortgage bears interest at a rate of 3.14%. You verified with your existing mortgage lender that the prepayment penalty to break this mortgage will be $3,140. Now, is it worth the jump to a 5 year fixed rate mortgage at 2.69%?
DV Capital Corporation
FSRA Brokerage License:. 13186