Your mortgage renewal is one of the important elements of homeownership. You may consider it a routine process unless you pay the entire balance. Early renewals allow shopping around for better rates. Auto-renewal locks the deal with the same lender with revised rates. It also allows exploring the options provided by other lenders.
However, you may need to invest an adequate amount of time and effort in finding an ideal situation that meets your requirements. Here is all you need to know about early mortgage renewals, including their pros and cons. Visit this link to learn more.
When to consider mortgage renewal?
You’ll have to consider your mortgage contract renewal before the end of your current mortgage contract if you have an outstanding mortgage balance. The lender sends the mortgage renewal notice along with the renewal contract 21 days before completion of the term. Next, you have to decide whether to switch to another lender or stay with the current one. Finally, you are required to decide on the renewal date.
Top factors to consider when renewing mortgage contract
There must have been countless changes in several parameters since your last mortgage agreement. Hence, you may need to re-calculate your budget and consider other important factors when renewing the contract, such as your lifestyle, financial situation, and more. To help you make a better decision, we have listed the major factors.
1. Current monthly expenses
Your expenses may have either increased or decreased compared to when you last signed your mortgage. The number of monthly expenses play a huge role regarding how much an individual can afford. If your marital status has changed recently, you’ll need to consider this aspect.
Are you separated, divorced, single, or married? Do you have two or more persons working in the household? If there are more earning members in the family, you may consider frequent mortgage payments.
Besides, your long-term and short-term financial goals may also have changed over the years. Plus, you also need to consider your financial goals. For example, are you planning for home renovation? Are you looking forward to growing your family? Define your financial goals, and then look for a mortgage deal accordingly.
2. Current monthly/yearly Income
Income change is another essential factor to consider regarding mortgage renewal. There could be a promotion, raise, or loss of income. Are you nearing your retirement age? Depending on your situation or changes in income, you may be willing to pay off your mortgage faster. Or you may prefer lowering the mortgage payments if your income has been reduced. In this case, the mortgage payment period will be extended.
3. Fixed or variable rate mortgage
If your current financial situation allows you to take financial risks, you may sign up for a mortgage at a variable interest rate. Though it fluctuates according to the market condition, it is comparatively lower.
Therefore, a fixed mortgage rate is ideal if you wish to remain on the safer side. Note that the fixed rate doesn’t change for the particular mortgage term.
Pros of Early Mortgage Renewal
An early renewal allows homeowners to find mortgage deals at a low rate for the next term. Plus, it also allows them to capitalize on the current rates. So even if there is a rise in the interest rate, they won’t have to bear a higher cost.
Secondly, you can find the right deal before your current mortgage term expires. Starting early will give you sufficient time to research and find the potential mortgage offers provided by other lenders. Finally, it is recommended to use a mortgage payment calculator to calculate the exact mortgage amount.
Next, with early mortgage renewal, you’ll have the opportunity of negotiating the terms and conditions with your current lender. Then, finally, discuss the offers provided by other lenders.
Cons of Early Mortgage Renewal
Locking in a mortgage renewal deal early comes at an extra cost ranging from 0.10 to 0.30 percent on the renewed interest rate. If the interest rates are reduced after the deal is locked, you may pay a higher amount. Also, there are additional costs involved in the mortgage renewal. So if you consider switching to a new lender, you may have to bear that additional expense.
Generally, a penalty is levied on the borrower for breaking the mortgage contract before the term ends. Generally, the penalty charges are three months’ mortgage interest. However, it could be either at the current interest rate or differential rate (calculated using the new rate, current rate, and the months remaining of the current mortgage term). You may use a mortgage penalty calculator to calculate the prepayment penalty.
Generally, lenders allow renewal without penalty within four months of the renewal date. Most lenders reserve the rates for 120 to 180 days before the disbursement date. Borrowers should consider early renewal when there is a drastic increase in the interest rate.
It is best to review the options before the due date and negotiate the terms and conditions with the current or prospective lenders to make the final decision. But if the change in the interest is higher and will cost you more than the penalty for breaching the contract, then early renewal is an ideal option.
When it comes to mortgage renewal, you need to weigh the pros, cons, costs, and other options to make the final decision. For example, you may consider negotiating the rates with the current lender or looking for the next available option. But both options come with their fair share of benefits and limitations.
If need be, take the help of a mortgage broker. A professional will make it easy to find the right deal according to your future goals, financial situation, and lifestyle. They may also negotiate on your behalf and handle all the documentation and paperwork.