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5 Things You Should Know Before Renewing Your Mortgage

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Is Your Mortgage Coming Up for Renewal?

Many people get a letter in the mail or a call from the bank telling them that their mortgage is up for renewal.  Without thinking they sign the papers back and renew at the rate and conditions provided. 

Typically this is a mistake and one that can cost you thousands of dollars.

Before signing those papers learn these 5 critical things that could save you thousands of dollars on your mortgage renewal.             

1)      You CAN Negotiate with Your Lenders:

Most banks will never offer you their best rates to start.  Knowing this fact can be very frustrating and a bit insulting when many people feel the banks should be working to keep their business.  But the banks know that customers won’t look into other options or try to negotiate and so they start with a rate higher than their best offer. 

You do need to be realistic and cannot ask for rates below what anyone will offer, but lenders always have some flexibility to move on what gets offered up front.  Going in with realistic examples of what others are offering you goes a long way.  This requires you to do your research and see what other offers are available.  Your bank will then know that you are a sophisticated homeowner and are looking for the best situation for your needs.  They will then offer you their best rate, or a matching rate to ensure that they don’t lose your business.

Some people get offended by the fact that the bank does this and simply choose to go with another lender once they find that better rate.  Whether you do this or go back to your bank to negotiate is up to you.

2)      Lowest Rates, Good “Deals” and Teaser Rates Aren’t Always What They Seem.

Extreme low mortgage rates can sometimes be offered on websites.  Rates such as this can look very appealing to someone browsing on the net but what you do not know is very often those rates come with extra terms that may not suit your personal needs in your mortgage.

Terms such as:

  • Larger payout penalties if paid out early
  • Not being able to refinance before the term ends
  • Very limited options to pay your mortgage down faster
  • Not being able to port or port and increase during the term
  • Teaser rate is only for a certain intro amount of time and the rate after that is much higher than day to day rates in that term which end up costing you more.
  • Cash back offerings – very often have higher rates.  Banks don’t give you free cash for nothing in return.

 

Make sure you ask about these things when getting a renewal rate.  You don’t want to be moving or upgrading a few years down the road and realize that for $20/month less on your mortgage payment your penalty is $5000 more or realize that the end cost of a great starter rate is more out your pocket.

3)      There is Always Value of Getting a Second Opinion. 

Many people will shop around to 3-4 options when purchasing electronics and cars yet they don’t when looking at the most expensive asset they will ever own!

  • Consulting a mortgage broker for a professional second opinion is totally free to you! We have access to over 40 different lending partners and products meaning we shop around for you at no cost or time to you.
  • We can determine what products will suit your needs if your family is growing, job transfers are coming in your near future or you may need to access the equity in your home sooner than later.
  • As a mortgage broker, we work for you, not the banks.  We are here to help you find the best mortgage for your needs.

With a second opinion in hand, you are able to make the right choice and is well worth the time and effort.

4)      Switching Lenders at Renewal Isn’t Painful and As Costly As You May Think

The fear of going through a lot of pain and effort, as well as extra expenses, is one of the main reasons why people renew their mortgage with their bank rather than switch to a better offer.  This fear is really unjustified as switching lenders is really not that difficult.

Lenders generally only require income documents to prove you can still afford your mortgage along with items such as property taxes and your present mortgage renewal document. 

The lawyers will come to you for signing vs you having to go to their office. These lawyers cost you nothing for their services as the new lender covers these costs.  

If an appraisal is necessary, it is only at a minimal cost of $200-300.  In most situations that cost is offset very quickly by the monthly savings in a lower mortgage renewal rate.

The amount of time and effort needed to go through this process is almost always outweighed by the savings you will achieve with a better mortgage.

5)      The False Belief that Penalties to Payout Early are All the Same for All Fixed Products.

This is ABSOLUTELY not true. 

Let’s compare a Big Bank lender and a broker access lender otherwise called a Monoline.  A monoline is a lender that offers one product – mortgages.  Monolines are regulated by the government just like the major banks so they must follow similar disclosures and lending guidelines.  In fact, many Monolines receive their funding from major banks.  These lenders have no storefronts which means overhead costs are kept at a minimum which allows them to pass on the savings to clients in the form of lower interest rates and better terms.

Let’s look at the difference:

This is a story of Bobby bank and Molly monoline.  Both purchased a house and signed a 5 year fixed term at 2.99%.  There are no special terms on these loans.  Standard 5 year fixed. 

3 years into the loan both clients are selling their homes and paying out the mortgages.

(To keep it fair we will pretend both lenders are offering clients the same rates.)

They call their respective lender to find out the penalty and here’s where it gets scary……

Molly Monolines penalty:            $1868

Bobby Banks penalty:                    $8750

That’s a MASSIVE DIFFERENCE!! How does this happen you ask? Let me explain.

Fixed terms state that penalties will be calculated as the higher of 3 months’ interest or the Interest Rate Differential or IRD.  The math is a bit confusing but let’s pretend we are back in high school and not falling asleep in the back row =)

Monolines post their best rates upfront with no need for discounts = 2.99% Molly got

Big Banks have a posted rate but give you a discount – 4.79% -1.80% discount = 2.99% Bobby got 

A)     Big Bank IRD calculation:

2 year posted at that point is 3.04% – discounted 1.80% = 1.75% difference

(2.99% you received - 1.75% difference) x 250k mortgage balance / 12 months = $365 per month the bank figures you owe them for early payout penalty.

Take that $365 x 24 months left = $8750

B)      Monoline IRD Calculation:

2 year with a monoline is 2.79 - the real rate being offered for a 2 year fixed to clients

(2.99% your rate - 2.79% 2 year rate) x 250k mortgage balance / 12 months = $42/month you actually owe!

$42 x 24 months = $1008.

3 months interest on this loan is $1868 so with the rules lenders will go with the higher of the 2 options.  The IRD is lower than 3 months interest!

Both clients were paying the same monthly and thought they had the same mortgage.  But as you can see the banks thrive on charging early payout penalties and then are able to use this extra income to offer enticingly low rates when you start your mortgage.  When you come up for renewal it is a good idea to consider what are the early payout penalties and factor this into your decision. 

Even if you don’t think you’re going to have to switch your mortgage early, life happens and things change.  We’ve seen it many times where clients could save thousands by switching mortgage lenders mid-term but have that savings ruined by the penalty that they banks charge.  Or worse customers that are forced to sell their house and break the mortgage forcing them to pay the penalty. 

Before you sign the bank papers and renew your mortgage speak to a mortgage expert today to get a second opinion.  Don’t get caught with higher rates, larger penalties, or terms that don’t suit your needs.  Call Cheryl Wilkes at 780.909.3659 or Contact us for a free consultation.

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