Should you refinance early in order to benefit from low rates?
Are you considering refinancing your mortgage? Early refinancing has become a bit of a trend; not surprisingly though, everybody is aiming to save money where they can. Securing a new loan with far better interest rates for your home might mean saving money on monthly low mortgage rate payments, or utilizing the extra money on other ventures like remodeling or making investments.
Does Everyone Profit from Refinancing?
The decision to break an existing mortgage should not be taken lightly. Despite what the advantages appear to be on the surface, there are penalties associated with refinancing; penalties that could potentially leave less change in your pocket than you had anticipated.
34% of those who recently renewed or renegotiated their best Canadian mortgage rate did so prior to their term expiring. The average time to pay off a mortgage is 7.4 years less than the original amortization. (Source: CAAMP).
Do Your Research and Speak with a Low Mortgage Rate Specialist
If now is not the time to refinance, bear in mind that mortgage brokers can review your best mortgage rate at any time, so it is always possible to do something about your mortgage when you are prepared. Request your broker to conduct a mortgage analysis to find out if renewing your loan at a lower rate is worth it.
Determine What Your Penalties Are
Until recently, the main penalty you would likely ever need to pay was 3 month’s interest. If you have a fixed rate, financial institutions now also take a look at the Interest Rate Differential (IRD) and will charge the greater of the two.
Find out If It’s Worth It
Penalties can surely get expensive, however that does not suggest it is not worth exploring. In order to keep your company, financial institutions can take 15 % off the balance of your mortgage to calculate the penalty, as opposed to using the full amount, leading to a lower overall penalty fee.
In many cases, banks will provide a blended rate for the remainder of your mortgage period. Your penalty will depend on your lender and how well you can negotiate.
It merges your present mortgage at its existing rate with any additional money you borrow at the current rates. Doing this enables you to benefit from existing lower rates without needing to pay a penalty. Nevertheless, some banks could use the posted rate, as opposed to the lower rates to determine your new blended rate.
What You Will Need to Qualify
In order to qualify for refinancing you will need to have at least 10 % equity in your house. Both you and your mortgage advisor are able to find out if long term savings outweigh the penalty.
Open or Closed? Do you know which option is right for you?
Closed mortgages provide lower interest rates than open mortgages. Nonetheless, open mortgages include a smaller amount of fees.
What is a Closed Mortgage?
Closed mortgages cannot be prepaid, renegotiated or refinanced prior to maturation without paying a penalty. The majority of closed mortgages do provide a little flexibility by allowing you to pay back the principle through lump sum payments, or by enhancing your monthly payment amount for your best mortgage rate.
When to Consider a Closed Mortgage
Given that closed mortgages have considerably lower interest rates, they are more appealing to the average homebuyer.
When NOT to Consider a Closed Mortgage
If you believe that you will need to break your mortgage early.
What is an Open Mortgage?
Open low mortgage rate terms vary from 6 months to 1 year for fixed rates, and 3 to 5 years for variable rates. They may be settled prior to maturation without penalty.
When to Consider an Open Mortgage
If you are anticipating to get a large amount of money, an open mortgage will offer you the flexibility to settle your loan sooner.
The Beauty of Prepayments with Closed Mortgages
The majority of closed mortgages allow prepayment options, consisting of: lump sum payments as much as a portion of your annual principal, or enhancing your regular monthly Canadian mortgage rate payment.
How Much Does a Closed Mortgage Penalty Cost?
If you do choose to break your closed mortgage prior to completion of your term, you could possibly pay a penalty. The penalty you pay is the higher of either:
- 3 months of interest
- Or the Interest Rate Differential (IRD): the difference between today’s interest rate and the rate you currently pay
Would now a good time to break your mortgage and refinance?
This is a really common concern– when should I break my existing mortgage and refinance for a current best mortgage rate? It’s best to initially weigh out the costs.
Breaking your Mortgage
A Canadian mortgage rate agreement is a fully committed contract. There is an out clause, however it comes at a cost.
How Much is my Mortgage Penalty?
Typically the cost is determined based upon either three months worth of interest payments, or the interest rate differential (IRD).
Step 1: Calculate your IRD (Interest Rate Differential)
1) Use the principal balance and multiply it by the difference between your existing mortgage rate, and the new low mortgage rate.
2) Divide that number by 12.
3) Multiply that number by the remaining months in your term to obtain the approximate IRD owed.
Step 2: Calculate 3 Months of Interest
Just simply multiply the amount of interest you would owe on the present mortgage amount. Multiple this by 3.
Step 3: Find out the Penalty you Would Pay
When it comes to a fixed rate you would pay the greater of the IRD, or 3 months of interest. While in a variable rate, you would generally pay 3 months of interest. Contact your mortgage broker or lender to identify your specific required payments.
Step 4: Calculate Your Savings
1) Calculate the interest on your current mortgage rate.
2) Calculate the interest for your new mortgage rate.
3) Calculate your savings.
Step 5: Find out if it is Worth It
Decide if changing is worth it by comparing your expenses to your savings.
We’ve all heard the saying, “It’s the small things that matter most,” but what you might not know is this is also true when it comes to building equity into your home. Whether you’re thinking about selling now or later, it’s never too early to start investing in your home’s potential. Read more