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5 Questions You Need To Ask Before Renewing Your Mortgage in 2023
WHAT IS THE EXPECTATION FOR RATES OVER THE NEXT 5 YEARS AND SHOULD I GET A FIXED OR VARIABLE RATE?
The decision to go with a fixed or variable rate mortgage is highly dependent on the expectation of where interest rates are headed in the short to mid term.
If the general consensus is that rates are on the rise, you should consider a fixed-rate mortgage. You want to lock in the current mortgage rate if you feel that rates will increase in the near future beyond the rate you are being quoted at the moment. This will lock your monthly payment in place and protect the amount of equity you are paying down with each monthly payment you make. With that said, the key focus should be whether the variable rate will exceed the current fixed rate and how long it will take for that to happen. If the variable rate on a 5 year mortgage remains lower than the currently quoted fixed rate for 4 of the 5 years, it still may be beneficial to go with a variable rate. A competent mortgage specialist can help you to figure out which option may be best for you.
On the other hand, if rates come down in the short term, you may want to consider a variable rate as they are typically lower than fixed-rate mortgages and as interest rates come down, so will your variable rate along with your monthly payments or the amount of equity being paid towards the mortgage principal as opposed to the portion being paid to interest. This can significantly reduce the time it takes to pay off your mortgage.
WHAT ARE THE PROS AND CONS OF FIXED VERSUS VARIABLE RATE MORTGAGES?
Beyond controlling your monthly payments, the time it takes to pay off your mortgage, and what portions of your payments go to principle and interest, there are other factors to consider when deciding between a fixed and variable rate mortgage. One of the most important factors that is often overlooked is the penalties incurred for breaking a mortgage before the term is up. Typically, when you renew a mortgage, the rate is locked for a period of time. Usually, one, three, five or ten years.
The majority of mortgage terms are 5 years. Let's say you renew your mortgage in 2023 for 5 years. If you decide to sell that home before that 5-year term is up, the lending institution will most certainly charge a penalty. In most cases, the penalty for breaking a fixed-rate mortgage is significantly higher than a variable-rate mortgage. This will also vary by lending institution. Some "B" lenders can charge very high fees for breaking a mortgage before the term is up.
This is something you should consider in your decision, especially if you are unsure how long you plan on living in your home.
WHAT ARE MY PRE-PAYMENT PRIVILEGES?
It is a misconception that you can simply pay down your mortgage by whatever amount you like. Mortgage products and institutions have their own rules on how much you can pay down your mortgage in advance. If you are planning to pay anything over and above your minimum monthly payments towards your mortgage, it is important you understand the limitations between institutions and types of mortgages.
SHOULD I RENEW OR REFINANCE MY MORTGAGE AND WHAT IS THE DIFFERENCE BETWEEN THE TWO?
This is an extremely important question, especially considering the dramatic change in interest rates compared to just a few years ago. One of the greatest concerns for many people as they approach the time for their mortgage renewal is "Will I be able to afford my payments given the new interest rates?"
For some, the answer is "no", considering their payments may go up by as much as 80%. In cases like this, it may be necessary to consider refinancing over renewing.
When you renew your mortgage, you keep the same amortization. This means that if you bought your home in 2010 with a 25 year amortization, you should be done paying for your home in the year 2035. When you renew your mortgage, what you are renewing is the rate, the penalties if you break the mortgage, whether it is fixed or variable, and the length of time the aforementioned terms will be upheld before having to renew again.
Refinancing your mortgage is basically starting from the start. It is kind of like when you initially bought your home. If you refinance in 2023 you can renew your rate, penalties and amortization. This means if you choose a 25 year amortization with a refinance in 2023, you will be done paying for your home in 2048. This may sound undesirable, but may be the difference between keeping your home and having to sell it because you simply can't afford it. Refinancing generally helps to dramatically reduce your monthly payments as you're extending the time of the mortgage. This may also be something that should be considered if you have a high amount of consumer debt at high interest rates.
SHOULD I ATTACH A SECURED LINE OF CREDIT TO THE MORTGAGE?
Many institutions offer a Home Equity Line of Credit over and above your mortgage. This is basically a line of credit that is secured against your home and is typically at a lower interest rate than other credit products because it is backed by a property. This is also a good option to manage an excess of consumer debt at high interest, or if you have plans to renovate your home in the near future.