For most people, the largest financial investment in their entire lifetime is buying a house. Finding the right mortgage is key to that. For those who might want to move on in life, homeowners can learn of the great concept known as “mortgage portability.” Mortgage portability will allow this homeowner to take this current mortgage with them to a new property, which saves money and decreases some of the stress involved in buying a new home.
Below, we outline what mortgage portability is, exactly how it works, and the list of pros and cons. Later, we’ll discuss what to bear in mind in order to decide whether or not porting your mortgage will turn out to be acceptable for you.
What is mortgage portability?
Portability in this context means that the owner may transfer existing credit onto a new property without penalties and not have to get a new loan. This option is usually available only in the case of the house owner purchasing another home by selling the current one. Sometimes, this makes eminent sense if the homeowner has an advantageous interest rate they would like to maintain.
A lot of modern mortgages will have portability, but the terms can be very different; some allow full portability, meaning the whole mortgage is taken with you, and others allow only partial portability, meaning only a part of your mortgage can be taken onto your new home.
How does mortgage portability work?
The process of porting a mortgage typically involves several steps:
- Portability clause: The original mortgage contract needs to be checked for such a clause. If available, it would outline the details of what parameters the lender is looking for.
- Selling and Buying at the Same Time: Usually, the only few circumstances under which a homeowner may port a mortgage are many couples buying and selling simultaneously or during some interval from each other. Some lenders let the homeowner sell or buy within short time gaps, but that depends on the lender.
- Qualifying for the new mortgage: You may port your present mortgage, but the lender will make sure that you indeed qualify for the loan on your new property. The decision would keep in view your credit rating, income, and other financial information.
- Adjusting the Mortgage Amount: The adjustment in mortgage amount could be an increase. Sometimes, the new house that you may consider buying would be more costly than what you currently have; thus, you would need to “blend and extend,” meaning your lender combines your existing rate with the current market rate to come up with a blended interest rate on the additional amount you need to borrow.
Benefits of Mortgage Portability
Basically, there are a number of advantages of being able to port a mortgage:
- Cost Savings: This is a big advantage because the prepayment penalties will be avoided. If one breaks their mortgage early, associated fees could be very expensive, particularly when it concerns a high-interest-rate mortgage.
- Interest Rate Security: If you had secured a very low interest rate at the time of your original mortgage, then porting will allow you to retain this rate and save yourself a lot in the long run.
- Convenience and ease: The porting makes buying a new home hassle-free, getting you to make the financing process easier while retaining your current mortgage terms and avoiding a new loan application.
Mortgage Portability Disadvantages
Though it can be very good for mortgage portability, it might be better in some cases. A few possible disadvantages include:
- Stricter timelines: Most lenders have quite restricted timelines on when you can port your mortgage, which gets very tricky in cases when the timing of your sale and purchase does not align.
- Limited to the same lender: Because you generally have to stick with the same lender when porting a mortgage, this doesn’t necessarily give you the chance to shop elsewhere for a better deal.
- Additional Fees and Blending Rates: There will be additional fees as well as blend rates. If your new home requires a larger mortgage, the “blend and extend” process will bring you a higher overall rate compared to your original mortgage, especially when current rates are higher.
- Appraisal and Re-qualification: Most of the time, a lender will need an updated appraisal of the property you would be buying, and you should also re-qualify per your existing financial status. This, too, can be a challenge should your income or your credit score have always been different from the time you got your first mortgage.
Things to Consider Before Porting Your Mortgage
If you want to port your mortgage, here are a few things you will need to consider:
- Paying attention to current interest rates: If the mortgage rate is considerably lower than your current rate, break your mortgage and take up a new one. You do, though, have to work out any potential savings from a lower rate against any penalties.
- Mortgage Terms and Conditions: First, understand how your present mortgage stands. If you are nearing the end of your mortgage term, then consider other options available instead of porting.
- Fees: A small percentage of lenders, even in portability, charge some fees or may demand some minor adjustments if it is a mortgage agreement. Get such costs confirmed at the very outset.
- Quantity of loan required: If the new house is expensive and more quantity is required as a loan, then blending rates may impact the portability’s viability. Here, in this scenario, if it’s cheaper, you may be asked to give down part of the mortgage, which would mean certain fees.
- Market Trends: Consider the current real estate climate and any future possibilities regarding changes in interest rates. If the rates are likely to increase, then porting a low-interest mortgage would be almost a godsend.
How to Port Your Mortgage
Now, if you have decided to go ahead with the portability of a mortgage, follow these very steps:
- Approach Your Lender: First, phone your lender, stating your intention and finding out precisely what your portability clause contains.
- Confirm whether the new property qualifies: Many lenders do have set restrictions on the nature of the property that can be ported. For instance, it may specify issues related to location or status.
- Order an Appraisal of the Property: Just about every lender will require an appraisal of the new property so that they can be certain the property is adequate under their lending guidelines.
- Complete the Necessary Paperwork: Fill out any necessary paperwork; keep in mind that your lender may request you for some documentation and may even re-qualify for the loan at that stage.
- Coordinate timelines: Through your real estate agents, coordinate the sale of your current home and the purchase of your new home within the allowable porting period.
Final Words About Mortgage Portability
In simple terms, portability can bestow flexibility upon the owner should he wish to retain his previous mortgage rates even when buying another house. In essence, understanding how portability works, its pros and cons, and factors that come into play will further equip the owner with making realistic decisions aligned with financial goals.