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What a difference a year makes!

February 24th, 2009 Leave a comment Go to comments

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What a difference a year makes!

Economic forecasting seems to be getting more and more difficult. Who would have thought a year ago that interest rates would fall to the current level? We had an increase in fixed rates that started in 2007 and pretty much continued to December 2008. During this time many buyers thinking this was the trend decided to lock into fixed rates. Homebuyers locked in their mortgage at the 5 year fixed rate, which was around 5.75%.  Today we can get a 5-year rate as low as 4.29%. If you have a fixed rate mortgage it makes sense to re-evaluate whether it would be worthwhile to switch to a lower interest rate mortgage.

Breaking your mortgage will result in a prepayment penalty payable to your current lender.  The question is whether the savings from the lower interest rate is enough to cover the penalties and any closing costs on the new mortgage. Each situation would have to be addressed on an individual basis. I have run into several cases where there has been a significant benefit to switching to a lower rate.

Here is one such scenario:

  • Mortgage amount – $188,393
  • Term – 5 yr term with 2 yrs remaining on mortgage, – 22 year amortization
  • Interest rate at 5.75% – interest payable over next two years – $20,923
  • Interest rate of 4.29% – interest payable over next two years – $15,587
  • Difference equals $5336
  • Prepayment penalty of $1,865 – 3 months interest penalty

Difference in monthly payment: $153.95

The other huge benefit is that you are now in a 5 year mortgage at a rate of 4.29%, imagine the additional savings you will receive from the remaining 3 years.

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