If you have taken out a mortgage on your home, chances are you will need to renew it in the foreseeable future. Because most mortgage contracts expire after three to five years, they need to be renegotiated at the end of this term. Alternatively, you may choose an early mortgage renewal option, updating the contract several months in advance of the mortgage maturity. But should you renew your mortgage early? There are several factors to consider. Let’s explore them in detail:
What Does it Mean to Renew Your Mortgage Early?
Whenever you take out a mortgage to purchase a property, your loan will have a predefined fixed term. At the end of this term, you must either pay off the remaining loan balance or renew your mortgage. If you decide to renew and renegotiate the loan before its current term officially ends, you would need to go through the process of early mortgage renewal.
Mortgage Renewal vs. Refinancing
The goal of mortgage renewal is to simply extend your existing mortgage into a new term. While you may renegotiate the interest rate, you will continue paying down your original loan until the end of its amortization.
Mortgage refinancing, on the other hand, involves fully breaking your current mortgage contract and signing a new one. During this process, you will be able to make significant changes to your loan agreement, such as extending the loan amortization, increasing the mortgage amount, or adding or removing somebody from the title of the home. With mortgage refinancing, you may not only secure a lower interest rate, you will also be able to take out your home’s equity to complete renovations, consolidate your debt, or reinvest the funds.
Reasons to Renew Your Mortgage Early
Key reasons for renewing your mortgage early include securing a more beneficial interest rate or updating the loan type or term according to your financial situation.
Secure a Lower Interest Rate
If market interest rates are significantly lower than your current mortgage rate, you may choose to renew the mortgage early to secure the new, lower rate. Doing so will reduce monthly mortgage payments, saving you money on interest expenses.
On the other hand, in a rate-increasing environment, early renewal may act as a “defensive play.” By securing your rate sooner, you will be able to protect yourself from continuously rising rates up until your current term’s maturity.
With early mortgage renewal, you may also benefit from early renewal incentives your lender offers. Many lenders offer lower interest rates to encourage borrowers to continue working with them for another term.
Change Your Loan Type
In addition to securing lower interest rates, an early mortgage renewal will allow you to change your loan type or term. For example, borrowers with a variable-rate mortgage may want to lock in their rates with a fixed-rate mortgage if they expect mortgage rates to rise in the future. In addition, you will have an option to switch from an open mortgage to a closed mortgage and vice versa.
Finally, an early mortgage renewal allows you to choose the new term length. If you anticipate changes to your income, expenses, or marital status or if you plan to sell your home, you can change your loan term accordingly.
Drawbacks of Early Mortgage Renewal
While early mortgage renewal is beneficial on many occasions, there are certain risks associated with taking this route.
Potential Penalties
When considering whether to renew your mortgage early, keep in mind that lenders may impose penalties on early renewals outside of their allowed renewal windows. Typically, the penalty amount will be equal to three months’ interest at your current rate or the interest rate differential calculated using the current rate, the new rate, and the remaining period left in your mortgage term.
That said, most lenders will allow you to renew the mortgage penalty-free up to six months before the end of its term.
May Miss Out On Lower Rates in a Rate-Dropping Environment
Some borrowers choose to renew their mortgages early in an interest-dropping environment to secure lower interest rates and save on mortgage payments in the immediate future. However, in such situations, waiting until the complete mortgage maturity date may be more beneficial in the long run, allowing you to secure even lower rates at the end of your mortgage term.
Factors to Consider Before Renewing Early
So, should you renew your mortgage early or not? To settle on the answer, consider factors like changes in your income and expenses, marital status updates, or a potential sale of your home.
Change in Income and Expenses
If your household income increases (or expenses decrease), you may wish to start paying off your mortgage faster with increased payments. As such, borrowers with a closed mortgage should renew their mortgages early to switch to an open mortgage instead.
On the other hand, a reduced income or increased expenses may impact your ability to make mortgage payments. In this situation, early mortgage renewal to secure a lower interest rate may ease the payment burden and help you stay afloat until your financial situation improves.
Marital Status
Whether you are planning to get married or divorced, a change in marital status nearly always comes with significant financial implications. As such, coordinating your renewal with the change in marital status can make the transition much easier.
Note that adding your new spouse or removing an ex-spouse from your home’s title cannot be done during renewal and will require a mortgage refinance.
Plans to Sell Your Home
If you are planning to sell your home in the near future, you may want to renew your mortgage with a shorter term. To make the process of selling easier, choose the term that roughly coincides with when you are planning to sell.
How Early Can You Renew Your Mortgage?
While lenders are required by law to notify you 21 days before your loan term ends, it is often possible to renew the mortgage as early as 4 to 6 months before the end of the term. With such early mortgage renewal, you will have an opportunity to secure new, potentially lower, interest rates and change the length of your term.
However, be aware of potential penalties if you choose to renew the mortgage outside of your lender’s renewal window.
How to Renew Your Mortgage
Whenever you are ready to renew your mortgage, follow these steps to secure the right mortgage contract:
- Review your financial situation to evaluate any recent or expected changes to your income and expenses.
- Consider your plans, which may impact your finances and the ability to repay the mortgage. Are you planning on renovating your home, getting married, or having a baby? These and other factors play a key role in determining whether you should renew your mortgage early or at its term.
- Reassess your mortgage needs. Review your current mortgage terms and consider what you would like to see in your new mortgage: a short or long-term, a closed or an open mortgage, or a fixed or a variable rate.
- Reach out to a trusted mortgage broker. If you need help reassessing your mortgage needs, you can always seek advice from an experienced mortgage broker. Your broker can also help you find the right lender, negotiate the lowest interest rates on your behalf, and prepare all the necessary paperwork.
- Close the renewed mortgage. Review and sign the renewal agreement from the lender of your choice. After all the documents are finalized, the lender will provide you with the updated mortgage details. Congratulations, your mortgage is now renewed!
Working with a Mortgage Broker
Whenever you are considering whether you should renew your mortgage early, working with a mortgage broker can help you reach the right decision. An experienced mortgage broker like Jason Anbara will be able to provide you with valuable advice for your particular financial situation. If early mortgage renewal is the way to go, your mortgage broker will help you find the right lender, negotiate the lowest possible interest rates, and facilitate the entire mortgage renewal process.
Get in touch with us today to discuss your mortgage renewal options.
