Refinancing your mortgage: What comes before Step #1?
Most of you will be aware that I am convinced of the benefits of improving your financial position by refinancing your mortgage (I suppose the title of this blog is dead giveaway as well). You will however have to do a bit of homework before you can even start to consider this step. What you need to do can be summed up in a few short words: Research the terms of your current mortgage.
The reason behind this bit of research is that it may just be the case that you will be so heavily penalised for changing your mortgage that it would perhaps not be worth your while. Mortgage lenders are of course aware of the fact that they will lose a tidy sum of money if you switch providers and they therefore sometimes build mechanisms, to make you think twice about leaving them, into their products.
You should, in light of this, scrutinise your current mortgage documents to see if they include mention of any kind of pre-payment penalty or any kind of early payoff fees. Pre-payment penalties were basically designed to lock you into a specific mortgage product for a certain period as it penalises you for paying of a loan before a certain date. Most pre-payment penalties will disappear after about five years. If you had your mortgage for longer than this then you should perhaps not be too worried. If you have been paying off your current mortgage for shorter than five year you should certainly investigate.
The pre-payment penalty amount that mortgage lender charge varies a great deal. You should however (if your current mortgage deal includes these penalties) expect to pay, on average, an amount roughly equivalent to six months’ mortgage interest. This is clearly a significant amount and you will have to do thoroughly crunch the numbers in order to calculate whether refinancing would be a good idea, even with the penalty. In some cases having to pay a penalty could mean that you have to wait a bit, until enough time has passed for the penalties to be dropped. Having to pay a penalty should however not be seen as the last word on any refinancing deal. If you have been offered a particularly bad initial deal it may still be worth your while to move your business elsewhere. As with so many things in personal finance it comes down to your own particular circumstances and I urge you to seriously investigate what would be best for you.