Wednesday, June 22, 2016

Beware of the Penalty!!

Once again we are in a very appealing rate environment. Fixed rates are at all time lows which begs the question, how much lower can they go?  Variable rates are also super low. I never expected mortgage interest rates to be this low. That said it may be an opportunity for some and a curse for others.  The truth of it all is that low interest rates also cause huge payout penalties to break mortgages. 

If I were interested in breaking a mortgage early the very first thing I would do would be to contact my mortgage lender and ask them what the penalty would be if I paid out the mortgage today.  The lender has the ability to calculate the payout penalty to the Penny.    Don't let them get away with advising you it should be 3 months’ interest or something. Truth is, it is a very complicated calculation that only the lender can calculate accurately.  They should then advise you of the penalty and of the fact that it is subject to change. At the end of the day, that penalty could change considerably the next day. It is dependent on a number of factors.  If I was to calculate a penalty on behalf of my clients it would be an educated guess at best. Here is a link to a number of online calculators which can help determine roughly what the penalty could be.!payout-penalty-calculators/hkng6

How do we deal with large penalties? 

On a purchase I would first see if your mortgage was portable. If it is portable, then it would be my advice to attempt to move the mortgage to your new house.  If not, then you would have to figure out the penalty and decide if it is worth it to move or wait until the renewal date of the mortgage.

On a refinance I would attempt to leave the existing mortgage at the existing rate and apply for what we call a blend and extend. So apply for only the money you need with your existing mortgage lender at today's rates do you avoid a penalty. If that wasn't an option, we would have to figure out if you were saving enough in your new mortgage to warrant such a penalty and add it to your new mortgage if you have enough equity. If not, then you are left with equity take out and 2nd mortgages and so on. If all else fails, then you will have to wait until your mortgage renews to explore again.

If you are unsure or would like to discuss this in greater detail then please feel free to contact me;

Your Mortgage Broker For life
Shawn Mooney
Phone 403-828-1838

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