Consumers have been taught to compare prices for most major purchases in the search of the best deal. Mortgages are no different and many consumers shop for the best mortgage across multiple lenders looking for the best rate.
The difference with mortgages is the comparison isn’t apples to apples as mortgage terms are quite different across lenders.
The secret that your bank (probably) isn’t telling you is that your bank’s mortgages comes with a huge penalty. Ridiculously HUGE.
I recently had two clients approach me to refinance. Both had nearly identical mortgage rates and $500,000 balances, one client was facing a $4,800 penalty to refinance his mortgage, while the client who had his mortgage at the bank was facing a $34,000 penalty.
Both had locked into fixed rate mortgages when rates were higher at the end of last year. Both were paying 3.49% and mortgage rates have moved much lower (my lenders are offering 2.49% on 5 year fixed currently).
The penalty know as Interest Rate Differential (IRD) is applied when a client pays out their mortgage before the end the term. This is important because 60-70% of clients refinance a mortgage before the end of their term.
First there are countless real-life situations that cause people to sell or refinance properties before the end of their mortgage term – from opportunities to move closer to higher paying work, family obligations, accessing home equity to take advantage of investment opportunities, to death, divorce, and everything in between. The list is long and full of unexpected real-life situations.
People generally don’t sign up for a 5-year mortgage with the expectation that they will be breaking it before they end of the term. But in real life about 2 out of every 3 mortgages will be broken before the end of the term. Stuff happens.
My favorite reason to break a mortgage before the end of the term is when you can save money by refinancing. In the situation above, I was able to help a client saving $15,200 by refinancing (paying $4800 penalty and saving $20,000, $5000/year over his remaining term by paying 1% less on his $500,000 balance).
The bank’s client was out of luck, even though he had the exact same rate on his mortgage it cost him over $15,000 to get his mortgage from his bank. I just hope that he doesn’t need to sell before the end of his term.
I call my clients and let them know how much they can save by refinancing, something your bank won’t do and frankly it’s something your bank rep will never have to worry about with fixed rate mortgages.
Again, with fixed rate mortgages now hovering at 2.49%, there are opportunities for those paying higher rates to refinance and save money.
If you send me a picture of your mortgage statement (text 416-769-1440 or email firstname.lastname@example.org) – I will send you a free market evaluation of your property (Purview report), a free signed copy of my book, and let you know how much you can save by refinancing.