Exit Costs of a Mortgage
The top reasons people break their mortgage are divorce, sell their home, interest rates have dropped, they need to pull equity out of their home, job loss, illness or they need to pay out high interest debts/refinance. Unless you are 100% positive that none of these will happen to you during the term of your mortgage then this is the item that will save you or cost you the most money on your mortgage, not the interest rate.
• A prepayment penalty is the amount you are charged if you break your mortgage early. This charge is a way for the lender to recoup some of the interest costs that they would have made on their money had you continued with the mortgage you signed up with.
• The penalty is typically the greater of 3 months interest or the interest rate differential (IRD).
– The 3 months interest is very straight forward, you can look at your amortization schedule and add up what 3 months worth of interest will cost.
– The IRD calculation is more complicated, each lender has their own way of calculating it. Monoline lenders calculate the IRD based on the difference between your interest rate and the rate currently available in the marketplace
It feels great to get a discount on anything: However if the discount will be held against you later do you really want it? Beware of this little detail hiding in your paperwork. Not all lenders use a contract rate for their mortgage offers