If you currently have an existing mortgage that you and your spouse are paying off and you suddenly get wind of a new type of mortgage that will allow for a lower monthly mortgage rate, would you take it? Would you break your current mortgage in order to enroll in that new plan? For most people, the answer is yes if it means that they get to save a couple of bucks every month. But when is it really worth to break a mortgage?
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Before you break your current mortgage, here are some great tips to help you decide whether to proceed with the new mortgage or stay with your current one:
The difference in rates have to be at least 2% or higher
Find rates that will give you this rate difference to get your monthly mortgage amount to a lower amount. Some people are able to save as much as $200 a month just with the 2% difference. You can use that money to fund other things such as your next vacation and other things you want to buy.
Check if your contract allows you to break the mortgage
Some mortgages have clauses that allow you to just pay the penalty and move on to a lower mortgage. Others only allow you to break the mortgage after so many years. Some contracts don’t allow you to break your mortgage at all. Before breaking your mortgage, check the fine print to see if you have freedom to switch to a different mortgage.
The cost of breaking your mortgage
the penalty for breaking a mortgage is usually three months of your monthly payment. So, if you are paying $1,500 a month and your interest rate portion is only $500, your penalty for breaking the mortgage is around $1,500. If you have that money on hand, you can easily break your mortgage.
Check for other costs involved in breaking a mortgage
Read the fine print and see if there are other things you need to prepare for, moneywise, when breaking a mortgage. You could pay penalties as discussed in item#3 and other fees such as handling fees, service fees, and the like. These kinds of fees don’t often come cheap. In some cases, you might need to hire a lawyer to help you get out of a mortgage. Hiring a lawyer to handle these matters will definitely cost you.
Ask your current lender if he would like to match the lower offer from the lender you want to switch to
Some lenders would rather lower their rates than lose you as a client. Ask them if they are willing to give you a discount on your current mortgage in order to match the other lender that you are considering. You may not always get the same rate but at least it will still be lower than your current mortgage. It saves you the hassle of transferring your mortgage to a different lending institution. You also have to deal with less paperwork.
Before jumping into a new mortgage, make sure to study all the pros and cons of switching. Don’t immediately jump into what appears to be a trend in mortgage switching if you cannot afford to pay the penalties.
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