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Image by TheTruthAbout… via FlickrA friend of mine is a little stubborn about paying the penalty for breaking his mortgage and came up with a creative way of transferring portion of it to a lower mortgage rate. He gets A+ for creativity here.
It requires that you have a type of equity plan mortgage with room to borrow for more. His idea was to start another mortgage loan to the amount of his pre-payment on his mortgage. Apply the new funds towards the current mortgage and you have effectively transfered portion of your mortgage to a lower rate mortgage.
The limitation of this creative process is that you have to wait a year before doing it again. You can’t really know what the interest would be so you are rolling the dice on whether or not you should have paid the penalty. That said, it’s an interesting concept to leverage lower rates over time if you don’t want to break your current mortgage and pay the penalty.
I still would argue that over time, he would save more by simply breaking the entire mortgage and refinancing it.
Readers: What do you think of this creative strategy? Can you see yourself using it?
Hummm interesting decision by your friend. Its important to get some timely advice from your bank when considering what kind of mortgage fits your needs.
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He actually has pulled the plug on that. I think he is going to break. Anyone looking at their mortgage need to run the numbers to understand how much they can save.
In a way, you want to calculate the ROI on your penalty
It can help to break up the mortgage payment into smaller biweekly payments. Half a mortgage payment with each paycheck can feel a lot less stressful than coming up with a large chunk at once.
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