Will I have to pay a penalty if I re-finance and pay off my current mortgage early?
There are two questions to consider; firstly, does your current mortgage have a pre- payment penalty? Many mortgage programs do contain a pre-payment penalty and it is not uncommon for a borrower to be unaware of whether their mortgage does have such a clause. In all the excitement of buying a house, qualifying for a loan, etc. etc., one of the last questions on anybody’s mind is ‘what happens if I pay this off early?’ If you have been in your house for more than three years (and you haven’t refinanced in the last three years) then it is unlikely that you will have to pay a pre-payment penalty. Most pre-payment penalties last for three years or less. If your current mortgage is less than 3 years old then you will have to check the small print, or check with your lender, to see if there is a penalty and, if so, how big a penalty it is. In some cases, it can be fairly significant – maybe 3% of the loan amount – and would be a major factor in your decision whether or not to refinance.
If you have determined that you will not have to pay a penalty, or that the penalty is small enough that it still makes sense to refinance, then you will have to decide whether to accept a pre-payment penalty on your new mortgage. As with points, at first glance this may seem like a bad thing but in many cases it may make sense for you to accept a mortgage with a penalty. If you know that you are not going to move or refinance again in the next three years, then tell your mortgage broker that you’re quite happy with a pre- payment penalty – as you will never have to pay the penalty (because you’re not moving) there is no downside but you may be able to qualify for a mortgage program with a lower interest rate than if you insisted on a mortgage without the penalty clause.
Be aware that there are two types of pre-payment penalty; hard and soft. A hard pre- payment penalty kicks in whether you sell your house or simply refinance. A soft penalty only applies if you refinance, not if you sell. If you think that you might move in the next three years but know that you will not refinance again in three years, tell your broker that you will accept a mortgage with a SOFT pre-payment penalty.
Fixed or adjustable rate mortgage? Will I have to show proof of income? Assets? Employment?