Mortgage Prepayment Penalties – What you need to Consider

When entering a closed term mortgage, many borrowers do not pay nearly enough attention to the prepayment penalty clause. Often borrowers do not realize the seriousness of these penalties, until they want to get out of their mortgage and they are faced with paying potentially thousands of dollars to do so. When breaking your mortgage contract early, usually because of a refinance or the sale of your home, you will unfortunately have to pay your lender a penalty called a prepayment penalty – unless you are in an open mortgage. But, most borrowers enter into closed mortgage contracts as the interest rates are much lower for closed mortgages than open mortgages.

The prepayment penalty amount you pay will depend on a variety of factors including the day you signed your original mortgage contract, the term of that contract and your existing mortgage balance, rate type and mortgage rate. One of the biggest drivers of your mortgage penalty is whether you have a variable or fixed mortgage rate. Fixed rate holders pay the greater of interest rate differential or three months interest, while variable rate holders pay just three months interest.

As borrowers are coming close to the end of their current mortgage term they should be very clear on their goals. For example, if you believe you will want to pay your mortgage early – say you are expecting to receive a financial windfall in the near future, then you will not want to lock into a new term or you should only renew for a short-term term. Likewise, if you think you will need to move your mortgage to another lender changing the terms of your current mortgage, then these penalties may become payable and you should seriously consider your options before locking into anything.
For those who considering a reverse mortgage, it is very likely you will face the payment of a prepayment penalty to refinance your current mortgage if you refinance before the end of your current mortgage term. If you are considering a reverse mortgage and the end of your mortgage term is near, ask your current mortgage lender to allow your mortgage to float until you have been able to arrange the necessary reverse mortgage financing. This way your mortgage remains open in that interim period between the end of your current mortgage term and when it is paid out in full with the reverse mortgage funds.

The process to complete a reverse mortgage from start to finish can be completed within generally three to four weeks. Often it can be done much quicker depending on where you live, how quickly and appraisal can be done and the availability of your lawyer. The period in which the mortgage would be open would not be that long, but it could save you thousands of dollars in the long run.

If you are thinking of reverse mortgage financing, before you lock into your next renewal term please feel free to call me at 1-855-770-3225 or email joanne@mortgagesforseniors.ca. I would be happy to explain your options and help you navigate the process.

Joanne Thomas
joanne@mortgagesforseniors.ca
1-855-770-3225

Tips to Improve your Credit Score

The rush to get ourselves ready for the holiday season can often lead us to overspend and leave us wondering in the new year, how we are going to manage to pay our bills. If we do not manage our credit wisely, we can get ourselves into trouble, leading to a diminished credit score and fewer available good options when it comes to borrowing in the future. It can become a downward spiral until we are proactive in turning the situation around. The following are some tips to help you both prevent your credit from worsening and improving the credit score you already have.

Tip #1 – Pay your Bills on Time

Even if you make the minimum payment, paying your bills on time is probably the most important factor for keeping your credit score in good condition. Late payments can and do bring down your credit rating.

Tip #2 – Don’t Apply for Credit on a Regular Basis

Don’t be a victim to the intense marketing strategies of various retailers that offer you credit every time you are at the cashier. These applications are sent is and do negatively affect your score if they are numerous and frequent. Chose your credit wisely as the store incentive for signing up may not be worth it in the end.

Tip #3 – Try to keep your credit balance to under 30% of your maximum credit limit

While it is good to carry low balances to establish and improve your credit, carrying high balances has the opposite affect. Continued high balances looks like you are not able to handle your credit wisely.

Tip #4 – Don’t close out too many of your older credit cards

In keeping with tip #3, you want to continue the optics that you are good with credit. Therefore, having some credit cards which you have had for a long time shows your ability to manage your credit over the long term.

Tip #5 – Don’t buy too much on credit all at once

Again, back to optics, if you make too many purchases on credit around the same time, it gives the appearance that you are not financially stable.

Tip #6 – Don’t Pull your Credit Score too often

Like Tip #5, you should not have your credit score pulled too frequently. Every time you apply for credit, including a pre-approval for a mortgage, retailers and banks pull your credit. While credit card pulls are looked upon more negatively than those pulled by say auto retailers and banks, nevertheless, too many pulls will ultimately reduce your credit score.

Tip #7 – Try to avoid disputes going into Collections

Many of us do get into disputes over credit related issues and often rightly so. However, it is best from your credit score point of view, to try to reach an arrangement, pay the account and close it, rather than force the creditor pursue a collections remedy. A collection on your credit report will reduce your score and scare away creditors you wish to borrow or purchase from.

Tip #8 – Don’t go over your credit limit

Unlike some situations, were it is easier to ask for forgiveness rather than permission, when it comes to credit, you want to try an seek a credit increase before a purchase rather than go over your limit and suffer the consequences of a credit score reduction.

Tip #9 – Fix Mistakes on your Credit Report

What you must bear in mind is that your credit score is your responsibility and whether it goes up or down very much depends on your debt management. And, there are times when the credit companies make mistakes. It is imperative that these mistakes get corrected as quickly as possible and it is the consumers responsibility to follow up and do so. The credit bureau will provide assistance and important information to help you. This will go a long way to improving your score as errors will negatively affect your credit score.

Tip #10 – Make Sure Collections are noted as paid as soon as possible

Much like Tip #9, make sure your credit report accurately reflects your situation. If you have paid a collection, ensure that the collections agency follows up with the credit bureau company to ensure the collection is properly noted as paid, and if possible removed from your credit bureau.

Joanne Thomas
joanne@mortgagesforseniors.ca
1-855-770-3225