Should You Break Your Mortgage Early? Pros and Cons

When you sign onto a mortgage, the terms are locked in for a set period —say 3, 5 or even 10 years. But the universe doesn’t always cooperate with those timelines. Whether it’s a job change, growing family or changing financial objectives, you might even ask yourself: Should I break my mortgage?

At its most generic, breaking your mortgage refers to ending your current contract before the term expires. This may sound like a line that can lead to new opportunities, but it usually does not come for free. Here’s an overview of the pros and cons so you can decide if it’s the right thing for you.

The Pros of Early Mortgage

Access to Lower Interest Rates

If market rates have gone down since you closed your mortgage, breaking the contract could enable you to refinance at a lower rate. Even the slightest decrease — maybe from 6.5 percent to 5.5 percent or lower — can save you thousands of dollars in interest over time.

Greater Flexibility

Life changes quickly. Perhaps you have a new job in another city or are looking to upgrade to a larger home. Your mortgage comes with conditions that allow you to break your term and move, sell or change your financing to suit your needs.

Debt Consolidation Opportunities

By breaking or refinancing, you can tap your home equity to pay off high-interest debt. This can streamline your finances and reduce the amount of interest you end up paying.

Switch to Better Loan Terms

Maybe you initially went with an adjustable-rate mortgage (ARM) when you purchased and now desire the predictability of a fixed rate — or vice versa. When you break your mortgage, you get an opportunity to obtain terms that are more suitable for your financial goals.

The Cons of Breaking Your Mortgage before It Is Up

Prepayment Penalties

Many impose a penalty if you break your mortgage before the end of the term. Depending on the terms of your contract and how much you have left to pay, that could range from a few months’ worth of interest to thousands of dollars.

Additional Fees

In addition to penalties, there could be appraisal fees, legal costs and new mortgage setup fees. These can erode what if any savings refinancing would bring.

Risk of Higher Long-Term Costs

If you break your mortgage for a lower rate and take an extended term, you may end up paying more interest over the life of the loan — even if it’s at a lower rate.

Stress and Complexity

Walking away is not as simple a process to break the mortgage. It may require paper work, some calculations and negotiations that would take time and effort.

What to Ask Before Busting Your Mortgage

• What is the penalty and does the savings justify it?
• Will interest rates themselves fall further or have they already reached their nadir?
• Do I intend to live in this home long enough that refinancing would make sense?
• Do I hope to tap equity at a future date, or is it OK if that date comes at the time of renewal?

Alternatives to Breaking Your Mortgage

If the penalties appear too severe, you may have other alternatives:

• Porting Your Mortgage: Move an existing mortgage to another property with the same lender.
• Blended Mortgage: Add a portion of your current mortgage rate to a new, lower interest rate to avoid full penalties.
• Prepayments: You can also make lump-sum payments (if permitted) to decrease your balance without refinancing.

It can be a genius financial move to break your mortgage — but you’ll need to read the fine print first. Savings should be weighed against penalties and fees. For others, it’s an opportunity to lock in a lower rate, consolidate debt or add flexibility. For still others, the negatives may outweigh the benefits.

At Monalending, we also aid homeowners in the calculation of the sums so that they have all their choices by hand. We want to make sure that you’re picking the path that is actually going to be in service of your long-term financial health.

Thinking about breaking your mortgage? Get in touch with Monalending today for a customized evaluation to see if it’s the right move for you.