Owning a home is a significant financial commitment, and sometimes circumstances arise that prompt homeowners to consider breaking their mortgage for a better rate or a complete refinance. However, it's crucial to understand that such decisions often come with penalties. In this blog post, we'll delve into the reasons homeowners may contemplate breaking their mortgages, explore the penalties involved, and emphasize the importance of seeking professional guidance when considering such financial moves.
Why Homeowners Consider Breaking Mortgages:
For those in 5-year fixed mortgages, the third year often becomes a pivotal point for contemplating a mortgage break. Homeowners may explore this option for various reasons, such as debt consolidation or adapting to changing life circumstances.
Understanding Mortgage Break Penalties:
The penalty for breaking a mortgage typically involves the greater of three months' interest or the interest-rate differential (IRD). The IRD represents what your mortgage lender expects you to pay to compensate for potential losses incurred by releasing you from the mortgage and lending the money at current rates.
It's crucial to note that not all lenders calculate the IRD the same way, underscoring the importance of obtaining the precise penalty from your lender. Many lenders offer prepayment penalty calculators on their websites, providing homeowners with a tool to estimate the costs involved.
The Role of Mortgage Professionals:
When contemplating a mortgage break, it's advisable to consult with a mortgage professional. They can review the terms and conditions of your mortgage and conduct a comprehensive assessment of your situation to determine whether the benefits outweigh the costs. Importantly, this service is often provided at no cost or obligation.
Mortgage professionals bring expertise in advising homeowners, offering valuable education and resources to guide them through the decision-making process. This ensures that homeowners are well-informed and equipped to make sound financial choices.
Rolling Penalties into the New Mortgage:
One practical aspect to consider is that often, penalties can be rolled into the new mortgage. This means that homeowners do not have to worry about immediate out-of-pocket expenses, making the transition smoother.
In the complex landscape of mortgage breaks, being well-informed is crucial. Homeowners should weigh the benefits against the costs and, most importantly, seek the expertise of a mortgage professional. These professionals can provide tailored advice, educate homeowners on their options, and guide them through the process, ensuring that they make informed decisions aligned with their financial goals.
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Bailey Simner
INVIS Mortgage Professional
204-346--2357
bailey@simnermortgages.ca
