The last thing you want to think about is any penalty you face if you have to break your mortgage. As many as seven out of ten borrowers with a 5-year fixed-rate loan find it necessary to make adjustments. Some people have to find a larger house while others face financial difficulties that force them to refinance. Regardless of the reason, a large number of homeowners might need to break their mortgage and may need to pay large financial penalties. If you are worried about mortgage penalties here are 6 questions that will help you avoid them and will give you something to consider.
In the financial world, this type of penalty is known as an Interest Rate Differential, or IRD. The penalty represents the amount borrowers are responsible for if they want to adjust their mortgages. Financial institutions used to intentionally make it difficult for borrowers to calculate penalties and many consumers were overwhelmed with the staggering cost. Regulations now require lenders to explain all penalty charges clearly in language that anyone can understand. They also have to post online tools that make it easy for users to calculate their penalties.
Despite improvements in the system, borrows may still have their costs affected by hidden factors. One example is if you received a discount when the lender approved the loan. The online calculator does not figure in the discount and its impact on your penalty. Here are some questions about penalties you should discuss with your Capital Mortgage broker.
Is my penalty based on discounted rates, bond yields or posted rates? Without this information, you have no idea what the bank bases your penalty on and will have no way to determine the cost.
If you remain my lender after I break the mortgage, are there any benefits for me. Will I be eligible for a penalty discount? Many financial institutions offer incentives to retain borrowers.
Do you use a nearest term or shorter-term rate to calculate the penalty’s comparison rate? A higher comparison rate will mean a lower IRD. Timing may also affect the penalty amount.
Is there a penalty for increasing my mortgage payment? You may want to pay off the debt sooner or make upgrades.
If I pay the penalty, is there an opt-out provision? Some borrowers are unable to opt out unless they sell the home.
How long are penalty quotes valid? This is good information to know if interest rates are decreasing.
Many people are interested in adjusting a mortgage. Contact our team at Capital Mortgages with any questions you have about this topic.