One way to watch your money slip away from your pocketbook and disappear is by breaking your mortgage, unless the changes it will create are financially beneficial. To determine exactly what financial gain there will be you need to use a mortgage calculator (look for many free ones online) to help figure out the precise details. Interest rates are at all time lows currently and this can mean substantial savings over the lifetime of your mortgage loan.
Do you have a closed or open mortgage?
When you signed on the dotted line with your current mortgage holder you would have made a decision between an open or closed mortgage. An open mortgage does not commit you to any set mortgage term in that the homebuyers have the option to repay their loan any time and do so without penalty. This grants the flexibility to buy then sell a home at any time as you move up into better or more expensive housing. It will also work out well if you choose to downsize before the length of your contract runs out. Conversely if you decided to commit to a closed mortgage term your bank will have offered a better rate than an open mortgage. Deciding to break that closed term will mean the mortgage lender wants to be compensated for losing your current mortgage, via a penalty, whether they are the new loan holder or not. The decision to break cannot be taken lightly but the numbers will tell the tale if you are saving or squandering money.
Fixed rate or adjustable rate mortgages benefit when rates are low
Whether you are currently in a variable rate or fixed rate mortgage you may very well benefit by breaking your mortgage and beginning over with the low rate of interest that is currently available. Even though a difference in percentage points on their mortgage can mean many thousands of dollars in savings, many do not become involved with studying the differences or even consider asking an expert advisor. It is suspected that many simply fear actually knowing how much they will ultimately pay for their $200,000 mortgage when figured out over fifteen or twenty five years. The truth is that with any rate savings you have a greater opportunity to reduce the length of your mortgage and keep more money in your pocket.
Mortgage calculations tell the tale
Before breaking your mortgage you first need to determine how much you will save and if that penalty is worth paying to realize savings. Shopping around to determine if you can get a better deal elsewhere is what the mortgage game is all about. Each competing lender has offers to entice customers even though the rate of interest remains fairly steady for now, it can be raised or lowered a bit depending on the bank or lender. Talking to a Mortgage Agent will save you some time as they do these types of calculations all the time and can quote you some numbers very quickly, but if you are adventurous here are the steps involved.
Using a mortgage calculator you can determine the monthly payment on today’s rates compared to the rate you have now. The difference in payments will represent the interest costs especially if you make sure to use the same amortization on the calculator as your current amortization on your remaining mortgage. That is step one, step two involves in determining the remaining mortgage balance after your term expires compared to the remaining balance on a new mortgage after the same amount of months go by. Mortgages are compounded semi annually so every 6 months the amount of interest and principal on your monthly payment is reevaluated based on your rate. There will be an overall difference in your remaining mortgage balance as you will be progressively paying a slightly larger amount of principal while your payment stays the same. Once you have the difference in those two remaining balances adding the savings together with step one will give you a total savings over the remaining time left in your term.
One last thing to remember, renewing early today will mean a lower 5 year mortgage rate than renewing in 2 years from now. We are still at emergency rates so it does not take a crystal ball to foretell that we will have higher rates as we move away from the recession troubles we recently faced. If you do nothing and wait till your renewal date on your mortgage you will have to take the rates available at that time. Renewing today will lock today’s low rates for the term you choose (average term 5 years) and will ensure that you do not have to renew at those higher rates later.
Talk to a licensed Mortgage Agent, they can help make sense of the numbers and put them into perspective by comparing costs and savings over time. It may save you thousands to break and get a new mortgage, conversely, and very rarely, the calculations may reveal that you just break even and staying where you are just makes sense. Remember we are talking about the biggest loan the average Canadian is likely to borrow. The path to saving money is all revealed in the numbers and those numbers are worth looking into.