Know the penalties:

Knowing the rules of any game, usually gives
you advantage. The same goes for the mortgage
game. No one knows the rules better
than a full time mortgage professional that
deals in the “mortgage game” every day.

With record low rates a lot of borrowers are
choosing to refinance their mortgage to take
advantage of the savings. It’s important to do
the research up front to determine a number of
things:

• What exactly are the savings? Both monthly
and over the balance of my term.
• How much will my penalty be?
• How long will it take to recoup my penalty?
• Is there a way to lower my penalty?

While all points are important, the last one is
key. A true mortgage professional will easily
work through the first 3 points and do a full cost
benefit analysis to refinancing, and determine
your actual penalty and savings down to the
penny. The penalty does play a major role in
this scenario, and here’s where the twist comes
in.

With interest rates being so low right now, most
borrowers in fixed term mortgages will have to
pay an Interest Rate Differential penalty to get
out of their mortgage. These can be significant
as the amount of your penalty is determined by
the “spread” or “difference” between your old
interest rate and what rates are today for similar
terms (i.e. the amount of time you have left
on your mortgage.)

Armed with that knowledge,
there is an opportunity to hedge
yourself and lower your penalty.

If you’re not in a hurry to refinance,
and you believe interest rates have bottomed
out and will increase in the short term,
you can do the following:

• Book today’s rate for 120 days.
• Hope interest rates increase.
• Pay your mortgage off and refinance after
rates have increased.

Your mortgage professional will have to stay on
top of things to make sure your lawyer or notary
orders the discharge/payout statement from
your lender just before funding at the highest
possible interest rate day. That way your penalty
is minimized.

What this scenario accomplishes is the following:
You get your new mortgage at the bottom
of the barrel lowest rate, but your penalty is
determined on a smaller spread. You’ve got the
best of both worlds, lowest rate, and smallest
possibly penalty within the 120 day period.

I’ve performed this strategy many times in increasing
rate environments and the savings can
be substantial. The last client we did this for
saved $4,800 on their penalty by waiting 3
months to fund their refinance. Of course they
paid the higher rate on their old mortgage during
the 3 months, but the penalty savings were
worth more than the interest difference during
that period.