For whatever reason you’re thinking of cutting ties with your current lender, whether it be for a refinance or a renewal, there are a few things you should know before you make the decision to move. To help with the preparatory work, I’ve included a few key details that will help you decide if it makes sense to even consider leaving your current mortgage holder. After you’ve done some preliminary research on your own, the next step is to contact a mortgage specialist to explore what options are available for you.
DETERMINE THE PAYOUT PENALTY
If your mortgage is due for renewal, your term is over and you’re not breaking it early, you should not have a payout penalty. If you are still locked into your current term and you are not due for renewal within the next 6 months, before switching to a new lender you need to know what your existing lender will charge you to leave. These are known as payout penalties. While most “prime” lenders charge the higher of the two payout penalty options listed below, some “non-prime lenders” may also charge an additional payout fee. Hopefully you were made aware of the payout penalty calculations when you first took out the mortgage.
A payout penalty is charged when you pay off the mortgage balance owing prior to the renewal or maturity date, or pay the mortgage principal down beyond the allowable prepayment privilege amount. The most common payout penalty calculations are the GREATER of 3 months interest or interest rate differential (IRD).
3 months interest– (Amount currently owing on your mortgage) x (current interest rate charged divided by 365) x (90 days)
Example – $300,000 x .o25 (2.5%) divided by 365 x 90 days = $1849 payout penalty
Interest rate differential– The IRD amount is calculated on the amount being repaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate the lender can now charge when re-lending the same amount of funds to someone else for the remaining term of the mortgage. This calculation is a bit harder to provide an example for as every lender uses different interest rate types to determine the fee to break your current mortgage. The best way to get a payout penalty estimate is to contact your existing lenders customer service department.
If there is sufficient equity in the property available, most borrowers will usually add their payout penalty to their new mortgage amount so they’re not paying that amount out of pocket.
CONFIRM YOU CAN COVER THE COSTS
In addition to potential payout penalties and fees, there could be other costs associated with setting up your new mortgage with a different lender, which could include an appraisal fee and a mortgage re-registration fee. In addition to these fees, your existing lender will likely charge an administration fee or a re-investment fee for leaving them; typically that cost is approximately $200 -$300. You have a few options available to you to cover these costs; you can include them in your new mortgage amount, you can pay them out of pocket, or your new lender may cover some of those costs for you as an incentive to move your mortgage to them.
BE PREPARED TO RE-QUALIFY
Your new mortgage lender will not have any information about you so you will be asked to re-qualify to show them you can afford the mortgage they’re about to give you. You will be asked for documentation to confirm your income and your credit report is ordered as well. If your financial situation has changed since the last time you got a mortgage, the document requirements could be different than what you were originally asked for.
CRUNCH THE NUMBERS
If you are refinancing your home to access some unused equity, the guidelines are different than if you are simply switching your existing mortgage balance to a different lender. The reason for this is you’re only able to refinance your home at up to 80% of your home value, so you need to make sure you have enough room in your new mortgage amount to cover all of your existing mortgage costs if you don’t want to pay them out of pocket. If you are considering switching mortgage lenders only for a better interest rate, again, you need to determine if it is the right decision for you as it doesn’t come without some homework for you to do in satisfying the approval conditions of the new lender. Based on my experience, if your existing lender is advised you are considering leaving for a lower interest rate, they may then offer you their best rate to keep you with them; you won’t know what they’ll do to keep your business unless you ask them.
USE YOUR SUPPORT SYSTEMS
If you have decided breaking up with your current lender and switching to a new lender is the best decision for you, work with an experienced professional you trust. Don’t be afraid to get a second opinion, ask your friends, your family or read the reviews online. Picking the proper professional to work with can save you thousands so don’t underestimate the value in prioritizing the people part of the process.
I will leave you with a quick tip if you want to switch lenders at renewal time, but you don’t think it will be finalized by your renewal date. Renew your mortgage into an open term as this will afford you some extra time to move to a new lender and prevents a payout penalty when you actually do break up with your old lender.
For all your mortgage needs, contact Jackie at 780.433.8412 or firstname.lastname@example.org. Stay in the loop by following on Twitter @mortgagegirlca.