Well that is the question. Wondering whether to break your current mortgage to take advantage of the lower rates that are currently offered. Well here is an example that you can apply to your situation to see if now is a good time to take advantage of the lower rates.
Interest Rate Differentials (IRD)
Often a client needs an “idea” of how much their existing mortgage penalty might be before he decides to refinance or do an “early switch” with pre-payment penalty.
If the penalty is based on a rate differential, here is a BASIC calculation to figure out a close amount…..
Based on a:
$200,000 with 3 years remaining on a 5 year term of 5.70%….
…because there are 3 years remaining, the current 3 year rate is used to calculate the differential.
If the lenders current 3 year rate is 4%, there is a difference of 1.7%. Because there’s still 3 years left, the principal is also multiplied by 3
$200,000 x 1.7% x 3 = $10,200 penalty
(remaining principle)(Difference btw rates) (# yrs remaining)
**This is an estimate and will change every time rates change. If the differential increases, the penalty will also increase.
Now next you have to determine if the savings will exceed the penalty, and make the refinance worth while so here is another example. Interest rate in the before example is 5.7% and after is 3.99. Both with a 20 year amortization and a $2,400 annual tax bill included in with the mortgage payment, and house value of 400,000.
So as you can see in this case you will save $1,604.77 in monthly payments. Here is the big picture, by paying the $10,200 penalty, you will save $57,771.72 in payments over the next 3 years.
Please contact me for your personal analysis of your debts as every situation is different.
Thanks to Rachelle Gregory-Marshall my business development manager with Merix Financial for this great example of how to calculate our IRD penalties.
* Penalties in every mortgage are different. Please contact me to see if you are able to break with a lower penalty.