It’s official – mortgage rates are headed up. A lot of you might be wondering whether it makes sense to ditch your fixed rate mortgage early in exchange for a new lower rate. After all, even one percentage point can make quite a difference on your monthly payments. For example, going from 5% to 4%, a monthly payment on a $200,000 with a 20-year amortization goes from $1,314.25 down to $1,107.34 – a savings of $206.91 a month.
Sounds like a no-brainer right? But what makes it a tough decision is the prepayment penalty lenders charge when you break your mortgage early. Most closed fixed rate mortgages have a penalty that is the higher of 1. three-months interest or 2. the interest rate differential (IRD). The IRD is based on the amount you’re pre-paying and an interest rate that your lender can charge today when re-lending the funds for the remaining term of the mortgage. Click here to calculate what your penalty would be if you break your mortgage.
We’ve just been through all this – and we decided to switch to a lower rate early. Our five-year fixed rate mortgage term ends in July. So I called our mortgage broker just before the recent rate hike to see if I could get preapproved and lock into a lower rate with a new provider before July (doing this at least gave us the option to switch lenders to the lower rate).