Renewing Your Mortgage

By: RedRocketMortgages

If you own real estate the likely you have a mortgage. And generally speaking your mortgage is divided up into terms (typically 5 years) where the interest rate is set. Once the term expires you then start a new term with a different interest rate. So a typical 25 year mortgage will have 5 “five year terms”. The interest rate will be different in each of these terms. There are, of course, 1, 2, 3, 4, 5, and even 10 year terms. So there are lots of options for locking your interest rate.

What the majority of people do not take advantage of is that when your term expires you are free to move your mortgage to a different lender without penalty. For most people this is a big hassle. It involves taking time out of your busy schedule to visit different banks to haggle for the best deal.

About a month before your term expires you typically receive a letter from your bank advising you to renew with them at a new rate. In Ontario 60% of people just sign back this letter mainly because shopping for a mortgage is such a tedious hassle. The banks are fully aware of this reluctance to mortgage shop and therefore generally do not offer the best deals on their mortgage renewals. 60% of mortgage holders trade the convenience of signing back their bank’s mortgage renewal for the hassle of finding a new lender. This is costing them big dollars. Over the entire mortgage (typically 25 years) it is like buying a nice shiny new car and giving it to your banker.

So let me give you an example. Suppose your current term is about to expire and your mortgage is at $200,000 (you have 15 years left till becoming mortgage free). Your bank offers you a 5 years fixed rate of 4.5%. Little do you know that other lenders are offering mortgages at 3.7%. You think 0.8% - that’s really not a lot and probably not worth the effort. Well take a look at these numbers:

Your bank’s mortgage offering will cost $1,525.74/month. In 5 years your mortgage principle will be $147,502.60. You will have made a total of $91,544.40 in payments and your mortgage principle will have been reduced by $52,497.40. In other words you will have given your bank $39,047.00 in interest!

Now let’s look at the 3.7% offering. You can go two ways here: A) keep the payments the same and pay off your house faster or B) reduce your payments.

A) Same payments ($1,524.74/month). In 5 years your mortgage principle will be $139,984.44. You will have made a total of $91,544.40 in payments and your mortgage principle will have been reduced by $60,015.56. In other words you have saved yourself $7,518.16 in interest compared to the bank deal. Money that would have otherwise gone to the bank ends up in YOUR home equity not your banker’s pocket.

B) Reduced payments ($1,446.70/month). A savings of $78.04/month or $936.48/year or $4,682.60 over the 5 year term. In 5 years your mortgage principle will be $145,115.78. You will have made a total of $86,802.00 in payments and you mortgage principle will have been reduced by $54,884.22.

So clearly it pays to shop for a mortgage renewal. But still – there is the hassle factor of mortgage shopping that puts many people off. But there is a much easier way: engage a mortgage broker. A mortgage broker’s service are typically free as the lenders pays the broker a commission. Furthermore a mortgage broker has more lenders to talk to aside for the major banks. Think of it as a wholesale mortgage market – accessible only to licensed mortgage brokers.

Using a mortgage broker is much easier than dealing with banks. You can meet with your mortgage agent anywhere – like in your home during the evening or on a weekend. Your mortgage broker will then shop for you at dozen’s of lenders and come back with a quote. It’s just so much simpler than dealing with multiple banks and it will save you money – which in these times is sweet music to everybody’s ears!

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www.RedRocketMortgages.com

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