If you are an interested home buyer you may be aware of the wide selection of mortgages available. When you apply for a home loan, you must choose between a fixed-rate mortgage and non fixed (ie. variable rate) mortgages.
Interest rates for variable rate loans change over time. By contrast, a fixed-rate mortgage refers to a loan with a fixed, or set interest rate. If interest rates go down to where they are lower than your fixed rate mortgage, you might feel stuck. If that’s the case, then this article is for you.
In this article we ask, can you break a fixed-rate mortgage? Additionally, we will discuss the process, and implications and effects of doing so.
Can You Break A Fixed Rate Mortgage?
Yes, it is possible to break the loan agreement in a fixed-rate mortgage, but this process is not easy.
To reiterate, a fixed-rate house loan means that you agree upon a set interest amount that your lender offered. Thus, breaking a fixed-rate mortgage would effectively dissolve the terms that are written in the contract.
But how would you break your fixed-mortgage rate? First, let’s consider the why question, to understand whether the benefits are worth the effort of breaking this agreement.
Why Break a Fixed-Rate Mortgage?
Perhaps you are looking to reduce the costs of what you pay for every month. Maybe the interest rates have dropped a few points and you can get a much lower rate than you’re currently paying.
It is possible that breaking your mortgage, in order to switch to a lower rate could be a significantly cost and/or time saving for you. Ultimately this could allow you to own your home sooner.
Advantages of Breaking a Fixed-Rate Mortgage:
- Save thousands of dollars in interests rates
- Reduce your monthly payments
- Have the ability to adjust your mortgage term
- Get a new terms and conditions on your loan
Disadvantages to Breaking a Fixed-Rate Mortgage:
- The penalties and fees may cost you a lot
- The need to engage in additional due diligence
- The new terms and agreements may come with added terms and clauses
If you do decide to pursue breaking your contract, we advise you to be prudent. Because mortgages are some of the most complicated contracts out there. With the wrong step, it could cost you more money than it’s worth.
What are the Steps to Break my Mortgage?
First, understand what if there are any penalties for breaking your current mortgage and paying it off early. Again, these fees can add up so you want to find out what you’ll be on the hook for if you do break it. You’ll also want to factor in what fees you’ll have to pay to get a new mortgage.
Then you’ll want to research what the current mortgage rates are and use a calculator to estimate what your new payments will be. Or, if you’re working with a mortgage lender, you can have them do that for you. Next, do the math and make sure that the savings you’ll get from the new mortgage are worth it.
When it comes to figuring out the penalties for breaking a fixed rate mortgage, companies use a calculation called the interest rate differential or an IRD. Yeah, it’s about as exciting as it sounds. The formula used is the posted rates when you first got your mortgage. Then you will subtract it to the current mortgage rates. That difference is then multiplied by your remaining balance and divided by 12. What is next is to multiply it by the months remaining on your term.
This can be a difficult calculation and, again, you may want your mortgage lender to assist you. Or at least check your math to make sure it is correct.
Once you have this information, and you want to proceed, then it is time to consult your lender about your intentions. Then you go through the process to get your new mortgage, pay off your old one to break it and you’re done.
And there you have it. We hope you learned more about the process of breaking a fixed-rate mortgage, and advantages and disadvantages to doing so.