YOU NEED TO SEE THIS! PENALTIES LENDERS CHARGE
Know the fine print.
Whether you are thinking of selling / buying a new home, or refinancing to access some of your homes equity, if you are breaking your mortgage before your term is up then you must make yourself aware of the fine print in your mortgage contract. Every lender has their own calculations for breaking the contract early.
Not all mortgages are alike, nor are mortgage lenders. The penalty for breaking a variable rate mortgage is typically only three months interest.
If you have a fixed rate mortgage, the penalty is the greater of 3 months interest or the Interest Rate Differential (IRD).
The IRD is the difference between the interest rate on the existing mortgage and the current posted interest rate, for a mortgage term similar to the time remaining in the existing term (less any discount given at the time the mortgage was secured).
When calculating prepayment penalties some lenders use the current posted rate (not a discounted rate). Some lenders who have prepayment options will allow these to be exercised thereby reducing your penalty calculations should you request to do so.
Here’s a quick look at the difference in prepayment penalties between the banks and a Monoline Lender (a lender that deals specifically in mortgages).
For this example we’re using a remaining mortgage amount of $300,000 at 3.0% interest (with an original discount of 1.75%), 25 year amortization, funded January 1, 2015.
Note: Our clients receive all the information they need before making their mortgage decision. There is a lot more to mortgages than simply being approved. Always look at the difference in these penalties.