Is breaking your mortgage a good idea?
Nowadays, most lenders have accessible interest rates. Either you have an adjustable or for a fixed-rate note – regardless if you’re on a five, three or one year term mortgage, the chances that you’ll be charged on your unpaid principal balance at a pretty low yearly rate are definitely high. Some lenders are now offering incredibly low rates, as you can find an interest of 2.39% on a one year fixed-rate mortgage.
If you find yourself in a rather difficult situation, you don’t need to wait for an acceleration of your mortgage note in order to take measures. By breaking your mortgage, you can get rid of your high current interest rate, thus avoiding any possible foreclosure action or other remedy permitted under the terms of your mortgage. That being said, you should also be careful and you should thoroughly analyze if your mortgage is worth breaking as this process, as advantageous as it might be, involves penalties which you are required to pay in order to complete it.
The penalties involved in breaking your mortgage should be a big part of your final decision because in the end you might have the unpleasant surprise of the penalty being too high, in which case you’re better off with your already existing mortgage.
If your current mortgage becomes overwhelming, by breaking it and switching to a new one, you practically have the opportunity to start fresh. It’s almost like applying for your first mortgage all over again, but this time with a better understanding of the whole process and with more advantages on your side. Although both fixed-rate and variable-rate mortgages have breaking penalties, the ones for variable-rate mortgages are known to be significantly lower. With fixed-rate mortgage, the penalties are higher due to the interest rate differential calculation. In short, when calculating your penalty, the lender takes the interest rate from your initial mortgage on the date you break your mortgage and the current interest rate, thus calculating the spread between the aforementioned two rates. Any other loan modifications or interest rate discounts you had on your initial mortgage are also included in the penalty calculation. Of course, without the exact numbers, the cost of breaking your mortgage cannot be properly estimated, especially since your mortgage type and the lender you’re working with represent a decisive factor in the process of calculating your penalty.
Another “must” when deciding whether to break your mortgage or remain with the one you already have, lies in the fine print of your security instrument/mortgage. You always need to carefully read the fine print on your already existing mortgage as well as on the new one. This aspect requires special attention, as on some mortgages you will find that the interest rate differential is calculated by taking into consideration only the remainder of your term, whereas on more recent mortgages, due to the already low yearly rates, the interest rate differential is calculated based on your full mortgage term.