If you're considering renegotiating your current mortgage, you want to make sure this will be a valuable and smart choice. So before you speak with your lender about your current mortgage needs, here are some things you should know.
What Does it Mean to Renegotiate?
Renegotiating your mortgage agreement means you're re-evaluating its conditions - essentially breaking your contract with your lender. While there can be penalties involved, this may be worth it to lower your interest rates - potentially saving you a lot of money long term. Keep in mind your lender will most likely not allow you to change all the conditions as they need to know they will continue to profit off your loan.
What Should You Ask Your Lender Before Breaking Your Mortgage Agreement?
As mentioned above, most lenders will require you pay a penalty for breaking your contract. For this reason, you'll want to review your contract ahead of time to make sure you have an understanding of what fees may be charged. That being said, don’t be afraid to ask your lender to waive the fees as they'll sometimes make an exception depending on the contract. Here are some additional questions to ask when considering renegotiating your mortgage:
- Will I be charged administration fees?
- Will I be required to repay any "cash back" rewards I received at the start of my mortgage?
- Will I be charged for legal or disbursement fees to discharge the old mortgage and register the new one?
- What rate will the prepayment penalty be based on? (This will either be the posted rate at the time or the discounted rate you negotiated with the lender.)
How Are Lenders Profiting From Mortgage Renegotiation?
Previously, mortgage lenders would charge a three-month interest fee to their borrowers. Otherwise, they may use what's called an interest rate differential penalty. Of the two options, this is the more profitable as when interest rates drop, it helps lenders charge a bigger amount to their borrowers. This difference between the current rate and the market rate will grow causing your fee to grow as well.
Tips on How You Might Be Able to Lower Your Penalty Charges
Once you calculate the amount you'll be charged to renegotiate, you may find it isn’t worth it overall. The easiest way to determine this is by using a mortgage penalty calculator or contacting your lender.
If you decide it's worth it to renegotiate, you can make a lump sum payment of your fees or, if you can, pay down the balance on your mortgage loan before you meet with the lender, ultimately lowering the fees. Alternatively, If you don’t have the savings to pay down a huge chunk of your loan, you may want to consider blending and extending. This option will allow you to benefit from lower rates while extending the length of your mortgage.
By doing a little research ahead of time, you'll be in a better position to decide if renegotiating your mortgage is the right decision. Keep the above in mind when talking to your lender about which options may be best for you.