With low rate offerings over the past several years and a struggling economy, some homeowners chose to lock into a longer term mortgage even if the interest rate was a bit higher. If you are one of those people who feel stuck in a high rate 10 year fixed mortgage you may be wondering if you have options. The answer is YES.
Let’s consider the case of Dan and Anita who own a home and refinanced their mortgage 8 years ago into a 10 year term. They wanted to consolidate their high interest credit cards and their mortgage into one lower monthly payment and be secure with that monthly payment for as long as possible. The news was painting a picture of doom and they wanted to take advantage of the “record low” rate of 5.25% for 10 years. Over the past few years they have watched the shorter term rates for 5 year term mortgages continue to drop to under 3% and they feel they may have made a poor decision. But since they feel they are stuck in a high rate 10 year fixed mortgage with the potential of a high penalty to get out of the mortgage they have chosen to stick it out. The monthly payments are $1644 which they can afford but the potential of payments at under 3% for the remaining 5 years would be $1304 (based on the remaining amortization) which is hard to pass on.
A friend told them to talk to her mortgage broker to see what real options they had. After talking to the broker they learned the penalty for terminating a 10 year mortgage after 5 years is only 3 months interest or $1200 in their case (and legal fee of about $600). Dan and Anita were stunned they had missed this in the fine print of their mortgage agreement. And to top if off this policy is determined by law and not by the lender. This was great news for the happy couple. The broker also ran numbers to show them how they could further take advantage of the lower interest rate and increase their monthly payments to pay off their mortgage faster. By increasing the payment by 20% – which was still lower than what they were paying before and paying bi-weekly instead of monthly, they lowered their interest costs by $20,000 over the next 5 years and reduced their amortization from 25 years to 12 years!
The morale of this story is, if you are stuck in a high rate 10 year fixed mortgage and you are close to the 5 year mark, you should talk with your mortgage broker (I am happy to help) and see what options you have to save yourself some money on your mortgage. What would you do with a savings of over $20,000?