The real cost of breaking your mortgage early and when it makes sense.

People tend to think about mortgage penalties the way they think about parking tickets: unambiguously bad, to be avoided. That framing is reasonable but incomplete. A penalty is a cost. Whether it's worth paying depends on what you get on the other side.

The two common penalty calculations are three months' interest and the Interest Rate Differential, or IRD. Three months' interest is usually modest. IRD can be significant. It's calculated based on the gap between your contract rate and the current rate for the remaining term, and in a rate environment where rates have moved substantially, that number can be large. The specific calculation varies by lender, which is one of the reasons lender selection matters.

When does breaking make sense? When the savings from refinancing over your remaining amortization exceed the penalty. Sometimes that math works clearly in your favour. A lower rate on a large balance, with several years remaining, can pay back a substantial penalty in a reasonable time. Sometimes it doesn't, and the move is to wait. I can run those numbers with you when the time comes.

The situation I've seen hurt people is when they didn't know the penalty structure when they took the mortgage. They chose the lowest rate, signed with the lender that offered it, and discovered three years later that breaking would cost them $18,000. That penalty was always in the fine print. Nobody explained it because nobody asked. Ask.

Craig

Thinking about refinancing? Call me. (902) 209-4518