Mortgage Daily

Published On: December 26, 2022

Can a fixed-rate mortgage be terminated, and when does it make sense to terminate this type of loan?

Yes, it is possible to break the loan arrangement on a fixed-rate mortgage before the end of its term; however, it is not generally advised. Moreover, while fixed mortgage rates remain at all-time lows, many current homeowners may find that doing so is a useful tool that may put money back into their pockets. Therefore, knowing how and when to break a fixed-rate mortgage is vital information to have on hand.

In effect, if you now have a house mortgage, you may be paying more than necessary, and whether you break a fixed-rate mortgage will be crucial to ask. This is because if you refinance out of a fixed-rate mortgage, you can save thousands of dollars annually in mortgage payments, not to mention over the life of the loan. Read on to learn more about whether you can gain from restructuring or refinance your mortgage debt, as well as how much money you may save.

What Is a Mortgage With a Fixed Interest Rate?

A fixed-rate mortgage is a house loan in which the borrower agrees to borrow a specific amount from a financial institution (such as a bank, credit union, or internet provider) to purchase the real estate.

By its conditions, the interest rate you will pay on the mortgage (money charged for the service of the loan and the provision of these funds by the lender) is fixed at closing.

This fixed interest rate, as opposed to those associated with a variable or adjustable-rate mortgage (ARM), effectively sets how much you will pay in monthly interest payments throughout the life of the loan. Typical fixed-rate mortgage periods are 15 or 30 years, but you can also receive a fixed-rate mortgage with a unique term.

Can You Get Out of a Mortgage With a Fixed Rate?

As alluded to above, the answer is affirmative: You may prepay a fixed-rate mortgage before the lender-specified maturity date and completion of the loan term. Doing so might save you hundreds of dollars in interest payments annually or over the life of the loan.

In light of this, it is common for many homeowners to seek to break their fixed-rate mortgage if market interest rates decline and more advantageous interest rate choices become available in the future. In fact, given that market interest rates continue to hover at record lows, you may already be considering whether you can refinance your mortgage at a cheaper rate. Breaking your existing mortgage and refinancing to a new credit type with a lower interest rate might cut your yearly interest payments by hundreds of dollars or shorten your mortgage’s duration by several years, accelerating your road to homeownership.

Nonetheless, it is important to note that mortgages are sophisticated financial transactions with legally enforceable stipulations. The decision to breach a rule should not be made lightly, especially given the associated repercussions. Instead of immediately moving to break your mortgage when a special offer comes itself, the proper course of action is to sit down and do the numbers. If you’ve determined that the numbers line up (i.e., that possible savings exceed any downsides), you’ll want to contact your financial institution to determine what alternatives are available.

How to Get Out of a Fixed-Rate Mortgage

In general, the procedure for breaking a fixed-rate mortgage consists of the following steps:

  1. Determine your overarching aim. Ask yourself: Are you attempting to lower your monthly payment costs? Save tens of thousands on your mortgage? Change the duration over which you want to repay your loan. Once you have a more profound knowledge of your goals, you will better understand the financial solutions open to you. Note that you may also adopt a hybrid savings approach in this instance. This might involve decreasing your monthly payments over the same time from one mortgage loan to the next. Alternatively, you could maintain duplicate monthly payments while reducing the years required to repay the loan.
  2. Consider your savings potential. Once upon a time, the general rule was that it made sense to break a fixed-rate mortgage if the new rate was one to two percentage points below the current rate. However, rates are so low that you may want to investigate switching mortgages even for a lesser percentage drop, as savings may be proportional depending on the length of your loan term. Depending on the size of your mortgage’s amortization period, even rate decreases of less than one point might save you hundreds of dollars each month in interest payments.
  3. Consult your creditor. When you accepted a mortgage and signed the associated paperwork, you agreed to be bound by various legal terms and restrictions. There may be a clause stating that you must pay the penalty if you terminate your mortgage before your current payment plan ends. If you stray from the repayment plan you agreed to with your lender, you may be responsible for thousands of dollars in penalties, even if you’re paying off the whole sum of your loan in cash or refinancing. (Because doing so reduces the lender’s anticipated and agreed-upon interest payments.) Noting this, it is necessary to analyze the conditions under which your existing mortgage was granted and how much it may cost to break your current mortgage. 

Given the typically substantial prepayment penalties meant to safeguard lenders (who rely on regular interest payments from you over a certain period to accomplish their own financial goals), the choice to break a fixed-rate mortgage should not be made carelessly. Nonetheless, opting out of these contracts is a decision made by millions of other borrowers each year. Homeowners may desire to abandon their fixed-rate mortgage in favor of a new one for various reasons beyond basic interest-rate savings. Among these causes might be:

  • A desire to pay off their entire mortgage debt in advance
  • The desire to refinance and acquire a loan with alternative conditions or amortization terms
  • A desire to switch mortgage lenders
  • A sudden shift in one’s lifestyle or financial circumstances
  • The requirement to release more monthly revenue for expenses, education, or investments

What Are the Advantages and Disadvantages of Breaking a Fixed-Rate Mortgage?

As with any other financial choice involving real estate investment, breaking a fixed-rate mortgage is accompanied by possible benefits and drawbacks.

Advantages

  • Potential to save hundreds of dollars in interest
  • Ability to reduce monthly obligations
  • The adjustability of mortgage loan terms
  • Ability to get a loan under modified terms and circumstances

Disadvantages

  • Require advanced preparation and research
  • Fees and penalties can soon accumulate.
  • Required to do further research
  • It may include additional conditions and clauses.

How Much Does It Cost to Break a Fixed-Rate Mortgage Loan?

As indicated previously, depending on your lender, breaking a fixed-rate mortgage may incur penalties, which can quickly accumulate

As a penalty, holders of variable-rate mortgages may be required to pay three months of interest (and perhaps additional costs).

However, penalties on fixed-rate mortgages are typically higher, requiring you to pay whichever amount is greater: (a) 3 months’ worth of interest payments or (b) the interest rate differential (IRD) between the fees associated with your current mortgage’s interest rate and those associated with the new mortgage you intend to obtain. This disparity, which may sometimes surpass three months of interest rate fees by several thousand dollars and reach four- or even five-figure sums before the application of extra costs, is generally much larger.

Refinancing or breaking a fixed-rate mortgage to convert to a different loan product comes with additional fees, just as applying for a first mortgage does. This would necessitate another background and credit check, appraisal, inspection, and title expenses. As you may have observed when you received your first mortgage, these expenses might quickly exceed $1,000.

Before you break your fixed-rate mortgage (which may vary depending on your lender), make sure to contact your financial institution and request that they assist you in breaking down the statistics. As a consequence of these calculations, you can determine at a glance if the penalties you incur are proportionate to the possible advantages you stand to acquire. The ultimate determining factor in deciding whether to break a fixed-rate mortgage is not whether you can do so but how much it will cost you to make a move.

What Options Do You Have if You Break Your Fixed-Rate Mortgage?

After deciding to exit a fixed-rate mortgage, you may pay off the remaining sum in cash (thus securing entire ownership of the house) or investigate alternative home mortgage choices. Many borrowers, for instance, opt for adjustable-rate mortgages (ARM).

Under the provisions of an ARM, interest rates might fluctuate based on market conditions, but your monthly payments will stay constant. With an adjustable-rate mortgage (ARM), you may pay less interest during the introductory period (resulting in a lower first monthly payment) and, if rates decline, over the life of the loan. Nonetheless, if interest rates increase, an ARM may become more costly.

The Conclusion

Fixed-rate mortgage interest rates remain at all-time lows, presenting several chances for new homeowners. Those who are now stuck into fixed-rate mortgages with higher interest rates may be envious. Thankfully, the ability to break a fixed-rate mortgage still exists. Despite the typically significant prepayment penalties linked to breaking a current house loan, it is prudent to break your present home mortgage and switch to a new loan program, according to certain calculations.

Breaking a fixed-rate mortgage only sometimes makes sense due to the administrative and penalty penalties connected with doing so. However, there are situations when it makes perfect sense due to the savings potential involved. If you’re interested in determining whether or not it makes sense to break your fixed-rate mortgage, be sure to perform some financial calculations and see a financial lender as soon as possible.

FREE CALCULATORS TO HELP YOU SUCCEED
Tools for Your Next Big Decision.

Amortization Calculator

Affordability Calculator

Mortgage Calculator

Refinance Calculator

FHA Mortgage Calculator

VA Mortgage Calculator

Real Estate Calculator

Tags

Pre-Approval Resources!

Making well educated decions in a matter of minutes and stay up to date on the latest news Mortgage Daily has to offer. Read our latest articles to stay up to date on what’s going on…

Resource Center

Since 1998, Mortgage Daily has helped millions of people such as yourself navigate the complicated hurdles of the mortgage industry. See our popular topics below, search our website. With over 300,000 articles, we are guaranteed to have something for you.

Your mortgages approval starts here.

Add 1-2 sentence here. Add 1-2 sentence here. Add 1-2 sentence here. Add 1-2 sentence here. Add 1-2 sentence here.

Stay Up To Days with Today’s Latest Rates

Mortgage

Today’s rates starting at

4.63%

5/1 ARM
$200,000 LOAN

Home Refinance

Today’s rates starting at

4.75%

30 YEAR FIXED
$200,000 LOAN

Home Equity

Today’s rates starting at

3.99%

3 YEAR
$200,000 LOAN

HELOC

Today’s rates starting at

2.24%

30 YEAR FIXED
$200,000 LOAN