# Break your 5 year fixed mortgage.



## Shayne (Apr 3, 2009)

If anyone is 1.5 - 2 years into a 5 year fixed rate mortgage you can save thousands of dollars by breaking your current mortgage and getting a new 3 year rate under 3%.

In the last week I have done this for 5 families saving them between $4,200 and $7,900 with no money out of there pocket. Conversely a couple of families have taken a lower payment instead ensuring that there end balance is the same. And yes, this is after penalties and legal fees.

Ideally you have some equity to cover the penalties and fees. 

P.S. This is a public service announcement giving those in this community an opportunity to save some cash. Please don't think I am trolling for clients because right now I have lots.  If you need me to do some math for you, let me know.


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## Scottlandlord (May 27, 2010)

Shayne said:


> If anyone is 1.5 - 2 years into a 5 year fixed rate mortgage you can save thousands of dollars by breaking your current mortgage and getting a new 3 year rate under 3%.
> 
> In the last week I have done this for 5 families saving them between $4,200 and $7,900 with no money out of there pocket. Conversely a couple of families have taken a lower payment instead ensuring that there end balance is the same. And yes, this is after penalties and legal fees.
> 
> ...


Excellent post, Shayne.

I've broken mortgages before, and thank God I did. For example in 2007 rates were rising and I locked a few of my properties in. In 2008, with rates dropping, I broke the mortgages and have saved thousands upon thousands of dollars doing so.

For us frugal and careful investors, it's intrinsically tough for us to spend so much breaking a mortgage. However, think longer term...be proactive...

*
Again, great post Shayne!*


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## the-royal-mail (Dec 11, 2009)

Be VERY careful and consider ALL the costs when doing this. I broke a mortgage a couple of years ago and it cost me thousands in fees. I'm not going to itemize them for you, but suffice it to say they require investigation prior to any decision or action. Call your lender and ask them to tell you what ALL the costs will be if you do this. You may be in for a bit of an unpleasant surprise.


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## Shayne (Apr 3, 2009)

the-royal-mail said:


> Be VERY careful and consider ALL the costs when doing this. I broke a mortgage a couple of years ago and it cost me thousands in fees. I'm not going to itemize them for you, but suffice it to say they require investigation prior to any decision or action. Call your lender and ask them to tell you what ALL the costs will be if you do this. You may be in for a bit of an unpleasant surprise.


I agree, do your due diligence. Fees and penalties will always exist, but right now it is almost impossible not to come out ahead in the scenario I mentioned.


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## dilbert789 (Apr 20, 2010)

When do you find the IRD (Interest Rate differential) calculation kills the potential gains from the new rate? Around 2yr?

I tried my numbers using the RBC calculator and am down a couple grand if I do. However I'm at almost 3years in of a 5yr fixed at 5.4%.


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## Scottlandlord (May 27, 2010)

dilbert789 said:


> When do you find the IRD (Interest Rate differential) calculation kills the potential gains from the new rate? Around 2yr?
> 
> I tried my numbers using the RBC calculator and am down a couple grand if I do. However I'm at almost 3years in of a 5yr fixed at 5.4%.


It's all a numbers game. It's too bad you didn't break a couple of years ago and went variable. Think of the money you would have saved.

Just find all your fees, punch in your numbers and go from there.


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## Shayne (Apr 3, 2009)

dilbert789 said:


> When do you find the IRD (Interest Rate differential) calculation kills the potential gains from the new rate? Around 2yr?
> 
> I tried my numbers using the RBC calculator and am down a couple grand if I do. However I'm at almost 3years in of a 5yr fixed at 5.4%.


It depends really on your unique circumstances. I just did one exactly like yours and it worked out pretty much even. Client was able to get the last year at 2.9% and need some cash out anyhow, so it worked for them.

Fire me your numbers and I will see what I can come up with for you. I don't rely on any online calculators, I use my own....


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## Scottlandlord (May 27, 2010)

Shayne, are you a mortgage professional? 

I'm only asking because I like what I read in your posts and would be interested in working with you on some of my properties that are coming due.


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## brad (May 22, 2009)

I think the other consideration to throw into the pot is the extent to which you add extra payments each month or year to bring down your principal. 

The mortgage lender doesn't want to lose the interest they were planning to make from you, so the penalty they assess typically amounts to the interest they would have made over the remainder of your mortgage at the current rate. But if you're routinely knocking down the principal with extra payments, you'll end up paying less interest over the remainder of your term -- in some cases way less, plus when it comes time to renew your mortgage you'll be renewing with a much lower remaining balance to pay off than if you'd just been making the scheduled payments. So even if the interest rate is higher at renewal, you might end up better off sticking with your existing mortgage and not breaking it.

As was noted above, everyone's situation is unique, I'm just pointing out that if you're making extra payments you should factor that into the equation as well.


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## Jungle (Feb 17, 2010)

Shayne said:


> Fire me your numbers and I will see what I can come up with for you. I don't rely on any online calculators, I use my own....


How do you figure the IRD, doesn't every bank uses a different method? Also, will new lenders cover the discharge and new legal fees?


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## Jungle (Feb 17, 2010)

brad said:


> I think the other consideration to throw into the pot is the extent to which you add extra payments each month or year to bring down your principal.
> 
> The mortgage lender doesn't want to lose the interest they were planning to make from you, so the penalty they assess typically amounts to the interest they would have made over the remainder of your mortgage at the current rate. But if you're routinely knocking down the principal with extra payments, you'll end up paying less interest over the remainder of your term -- in some cases way less, plus when it comes time to renew your mortgage you'll be renewing with a much lower remaining balance to pay off than if you'd just been making the scheduled payments. So even if the interest rate is higher at renewal, you might end up better off sticking with your existing mortgage and not breaking it.
> 
> As was noted above, everyone's situation is unique, I'm just pointing out that if you're making extra payments you should factor that into the equation as well.


This is interesting. I've always wondered if it was better to just pay down the mortgage or break it and use extra cash flow (put it on the debt through lower amortization) from the lower rate interest rate.


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## Jungle (Feb 17, 2010)

Wow prime - 0.85 five years fixed variable is being offered now. I'm doing some math now..


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## brad (May 22, 2009)

Jungle said:


> This is interesting. I've always wondered if it was better to just pay down the mortgage or break it and use extra cash flow (put it on the debt through lower amortization) from the lower rate interest rate.


I think it really depends on the situation and the size of your lump-sum or extra monthly payments. I can pay up to 25% of my original mortgage amount in extra payments each year without penalty, which means I could pay off the entire mortgage before my initial 5-year term is up. But that's in theory of course; in practice there's no way I can cough up that much every year. 

Let's say there's $150K left on my mortgage and I have two years left before my term is up for renewal. And let's say that each year I typically pay $15,000 in extra payments toward lowering my principal. If I break my mortgage today, the bank will charge me what they would have made if I were just doing my regular monthly payments over the next two years. But in fact I will have knocked the principal down by an additional $30K over the next two years, reducing the remaining balance and the interest that's calculated on it, so I have to factor that into the equation. 

If the new rate is so much lower that I end up ahead over the entire 5 years of the new mortgage, then sure I would break the mortgage. And if rates start climbing up dramatically in two years I'll regret not having broken the mortgage. But honestly nobody really knows where rates are going to be in two years; it's not much better than trying to predict the stock market. It's all a gamble.


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## Shayne (Apr 3, 2009)

Scottlandlord said:


> Shayne, are you a mortgage professional?
> 
> I'm only asking because I like what I read in your posts and would be interested in working with you on some of my properties that are coming due.


I am, but I am out west. It may be in your best interests to work with someone local.


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## Shayne (Apr 3, 2009)

> I think the other consideration to throw into the pot is the extent to which you add extra payments each month or year to bring down your principal.


You are correct, but you would have to more than double your monthly payments for this to work out in your favour.




> The mortgage lender doesn't want to lose the interest they were planning to make from you, so the penalty they assess typically amounts to the interest they would have made over the remainder of your mortgage at the current rate.


Not correct. The lender will charge the IRD which is basically the difference between your current rate and the rate then can again lend the money out at. Huge difference. 



> But if you're routinely knocking down the principal with extra payments, you'll end up paying less interest over the remainder of your term -- in some cases way less, plus when it comes time to renew your mortgage you'll be renewing with a much lower remaining balance to pay off than if you'd just been making the scheduled payments. So even if the interest rate is higher at renewal, you might end up better off sticking with your existing mortgage and not breaking it.


Not accurate. Everyone with good equity and around 2 years into a 5 year fixed rate will save by breaking, paying the penalty and taking a 3 year rate under 3%. As long as the lender is fairly standard in their IRD calculations. 



> As was noted above, everyone's situation is unique, I'm just pointing out that if you're making extra payments you should factor that into the equation as well.


I agree 100% Keep in mind that there are few people who can do this accurately.


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## Shayne (Apr 3, 2009)

Jungle said:


> How do you figure the IRD, doesn't every bank uses a different method? Also, will new lenders cover the discharge and new legal fees?


Lenders are not consistent with this. I always have a client call their lender to get their penalty. Then you have to monitor the rates of their lender. Any change in their rates and the penalty also changes.


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## Shayne (Apr 3, 2009)

Jungle said:


> This is interesting. I've always wondered if it was better to just pay down the mortgage or break it and use extra cash flow (put it on the debt through lower amortization) from the lower rate interest rate.


You have to do the math with both and do it properly. Again, if you are around 2 years into a 5 year fixed you will come out moving to a 3 year rate under 3%.


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## Shayne (Apr 3, 2009)

brad said:


> I think it really depends on the situation and the size of your lump-sum or extra monthly payments. I can pay up to 25% of my original mortgage amount in extra payments each year without penalty, which means I could pay off the entire mortgage before my initial 5-year term is up. But that's in theory of course; in practice there's no way I can cough up that much every year.
> 
> Let's say there's $150K left on my mortgage and I have two years left before my term is up for renewal. And let's say that each year I typically pay $15,000 in extra payments toward lowering my principal. If I break my mortgage today, the bank will charge me what they would have made if I were just doing my regular monthly payments over the next two years. But in fact I will have knocked the principal down by an additional $30K over the next two years, reducing the remaining balance and the interest that's calculated on it, so I have to factor that into the equation.
> 
> If the new rate is so much lower that I end up ahead over the entire 5 years of the new mortgage, then sure I would break the mortgage. And if rates start climbing up dramatically in two years I'll regret not having broken the mortgage. But honestly nobody really knows where rates are going to be in two years; it's not much better than trying to predict the stock market. It's all a gamble.


I won't touch on most of this, but is isn't always a gamble. I have locked in a savings of $5283. The only risk is getting into an accident on the way to the lawyers. 

You have to do the math and do it properly.


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## Scottlandlord (May 27, 2010)

Jungle said:


> Wow prime - 0.85 five years fixed variable is being offered now. I'm doing some math now..


Yes, and some little birds are telling me we could be looking at Prime - 1.0 in a few months.

Ah, real estate!


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## brad (May 22, 2009)

Shayne said:


> Not correct. The lender will charge the IRD which is basically the difference between your current rate and the rate then can again lend the money out at. Huge difference.


I'll take your word for it since you're the expert on this -- it's weird though because when I checked with my bank last year about the penalty it all worked out to roughly what I would have paid in interest on the remainder of my term if I had stayed at my current rate.


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## Shayne (Apr 3, 2009)

brad said:


> I'll take your word for it since you're the expert on this -- it's weird though because when I checked with my bank last year about the penalty it all worked out to roughly what I would have paid in interest on the remainder of my term if I had stayed at my current rate.


If that is a major bank and a regular mortgage (ie no cash back) then someone made an error.


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## Jungle (Feb 17, 2010)

Shayne said:


> Fire me your numbers and I will see what I can come up with for you.


Just wondering if you felt like fiddling with my numbers. 

24 months left
5.14%
Discount off posted rate was 2.1% ( 7.24 posted rate )
Balance is $119,000
Scotiabank


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## Financial Cents (Jul 22, 2010)

*How about these numbers...*

At 5.4% (unfortunately)
26 months left on 5-year fixed term
$175,000 left

Over $7,500 in fees I suspect...


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## Shayne (Apr 3, 2009)

Hi guys, 

I have no problem doing the math for you but I do require the following:

Current balance, payment amount and frequency, current interest rate and months remaining in the term.

I also need you to call your lenders for an accurate penalty. I can estimate, but that makes my calculations estimates and I don't like advising people based on an estimate.


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## Jungle (Feb 17, 2010)

Jungle said:


> Just wondering if you felt like fiddling with my numbers.
> 
> 24 months left
> 5.14%
> ...


Payment amount, $341 bi-weekly.

There is all the information provided. I have a good idea of my IRD ($7500), as I've used Scotia's template in our mortgage documents. Not sure how accurate it is, but it's close. 

What I can't seem to convince my self to do, or figure out convincing math, is paying the penality to break the mortgage for a lower rate when we are agressively making extra payments. 

About $1939++ is going on the mortgage as extra per month. On top of regular payments. Sometimes more, including dividend cheques from our stocks, HST relief cheques, Credit card reward income, rolled coins, etc.


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## Shayne (Apr 3, 2009)

Jungle said:


> Payment amount, $341 bi-weekly.
> 
> There is all the information provided. I have a good idea of my IRD ($7500), as I've used Scotia's template in our mortgage documents. Not sure how accurate it is, but it's close.
> 
> ...


With your low mortgage balance, length of term left and extra payments it does not make sense for you to break your mortgage. Mathematically you would lose.


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## Jungle (Feb 17, 2010)

Shayne said:


> With your low mortgage balance, length of term left and extra payments it does not make sense for you to break your mortgage. Mathematically you would lose.


Thanks, I have been figuring that. The penalty is still kinda big.


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## dilbert789 (Apr 20, 2010)

Jungle said:


> Payment amount, $341 bi-weekly.
> 
> There is all the information provided. I have a good idea of my IRD ($7500), as I've used Scotia's template in our mortgage documents. Not sure how accurate it is, but it's close.
> 
> ...



What is Scotia's IRD calculation? I sent my info to Shayne earlier but also didn't have my penalty amount. I have a call in to my bank for it but they drag their butt getting back to you...


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## Scottlandlord (May 27, 2010)

I don't mean to hijack this thread but....this is one of the most important and helpful real estate threads anywhere on the 'net right now.

Great work by all contributors and thank you Canadian Money Forum!

So many people are confused with breaking mortgages. Excellent advice here.


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## carllecat (Aug 3, 2010)

Hi Shayne, 

What about this??? 

http://canadianmoneyforum.com/showthread.php?t=3802

Let me know if that would be worth it. 

Cheers!


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## carllecat (Aug 3, 2010)

Shayne said:


> Hi guys,
> 
> I have no problem doing the math for you but I do require the following:
> 
> ...


Current Balance = $262,558
Frequency = Bi-weekly
Current Int. Rate = 5.09%
Maturity = May 1, 2012

I will let you estimate the penalty and will go from there.

Many thanks,


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## Jungle (Feb 17, 2010)

dilbert789 said:


> What is Scotia's IRD calculation? I sent my info to Shayne earlier but also didn't have my penalty amount. I have a call in to my bank for it but they drag their butt getting back to you...


Sorry dilbert, I did not see your post. Scotia has an IRD calculation in the mortgage documents. On the last page, it outlines how to calculate the IRD and even has the posted rate on there, when you first got your mortgage rate.


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## Shayne (Apr 3, 2009)

carllecat said:


> Current Balance = $262,558
> Frequency = Bi-weekly
> Current Int. Rate = 5.09%
> Maturity = May 1, 2012
> ...


Hi Carlecat,

There would be savings, but if this is the condo you posted in another thread you will be out of luck. A lender will not lend you more than what the place is worth. Sorry.


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## Jungle (Feb 17, 2010)

Hey Dilbert, I was posting the scotia IRD on RFD, so I just copied it here:


I have two mortgages with Scotia. If you look in your mortgage files, there are papers called "Cost of Borrowing Disclosure Statement"

On the back page, it gives you an IRD calculation and includes the discount you received, on your mortgage rate. 

I will post it here:

A= The annual interest rate on your mortgage
B= The current annual interest rate for a new mortgage, with a term that is the next closest to the remaining term of your existing mortgage, less the discount of ??% you received on your existing mortgage. (discount will have been printed in a box on last page) (next closest terms posted on Scotia website)
C= A-B, which is the difference between your existing interest rate and the discounted rate. Write C as a decimal; for example 6%= 0.06
D=The amount you want to pay off
E=The number of months left, until your mortgage term expires
F= (C x D x E) / 12 (estimated interest rate deferral)

* the larger amount will be closest to the actual amount, we may also add a $200 administration fee.


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## dilbert789 (Apr 20, 2010)

I find it kind of a joke that they take whatever discount that they gave you and subtract that from the new rate. 1.5% off a 6.9% rate is a discount of ~25%, where 1.5% off 3% is 50%. Unless your actually going to give me a new rate of 1.5% it's total BS. 

215k left on mortgage
5.4% interest rate (I had a discount, close to 1.5% ) 
2 years left
penalty of $15,000!


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## Shayne (Apr 3, 2009)

dilbert789 said:


> I find it kind of a joke that they take whatever discount that they gave you and subtract that from the new rate. 1.5% off a 6.9% rate is a discount of ~25%, where 1.5% off 3% is 50%. Unless your actually going to give me a new rate of 1.5% it's total BS.
> 
> 215k left on mortgage
> 5.4% interest rate (I had a discount, close to 1.5% )
> ...


Although I am not one to defend the banks Scotia's 2 year posted is 3.95% it is still to the bank's advantage a little bit. 

This is the exact same penalties everyone has had to deal with as most lender charge the same way. It is in the original contract you signed. 

It sucks, but it is, what it is....


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## Jungle (Feb 17, 2010)

I'm on the same boat. Within a year, that IRD will come down a lot.


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## Shayne (Apr 3, 2009)

Jungle said:


> I'm on the same boat. Within a year, that IRD will come down a lot.


As long as rates rise. If they don't the IRD may stay close to the same because now you have it calculated on a one year lesser term, the rate will be lower.


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## dilbert789 (Apr 20, 2010)

But if you buy a bigger house and increase your mortgaged amount they will reduce the penalty or remove it... 

When this one is up, variable to the end.


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## Jungle (Feb 17, 2010)

dilbert789 said:


> When this one is up, *variable to the end*.


Lesson learned that hard way. (for me too)


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## Shayne (Apr 3, 2009)

dilbert789 said:


> But if you buy a bigger house and increase your mortgaged amount they will reduce the penalty or remove it...
> 
> When this one is up, variable to the end.


More like reduce slightly or give you a blended rate.


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## Scottlandlord (May 27, 2010)

Rates are weird now....

USA is going down...yet Carney has raised rates (RBC KISS)

Now Harper said the stimulus is over.....


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## jamesbe (May 8, 2010)

What I don't get is this IRD thing... Every time I've done this I've simply paid 3 months interest not an IRD. Break the mortgage completely pay the 3 months interest which seems to be in every mortgage I have ever had and away I go.

Last time I broke a 5 year 1 year in, I had a rate of 5.8% at the time. I paid 3 months interest which was something like $3000 or $4000 I can't remember and then I switched to variable at 1.85% and well the rest is history I saved 10's of thousands in the last 2 years!!!


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## Drakestar (Jun 1, 2010)

we are in an interesting spot.

we've been paying WAY to high of an interest rate with HomeTrust. I went bankrupt almost six years ago (got sued by a big big big mean lawyer, and would have lost the case, so it was a good way to go, saved me about 200k).

anyway, I spoke with TD and they didn't think it would be a problem breaking my current mortgage even with the IRD penalty. of course they want the business and didn't seem to see me as a high risk.

Balance: 205,000 (house is worth about 315k)
Current Interest Rate: 6.65
Term: 11 months left of a 3 year term.
TD has offered 2.6% to move it.
The IRD is 3.15%

So the penalty works out to close to 6K. (close to 5500 when closing comes)

So we'd end up pretty close to even with the interest rate drop. We'll probably go for it, just to get it all settled.


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## tonyChapman (Dec 30, 2010)

If anyone is 1.5 - 2 years into a 5 year fixed rate mortgage you can save thousands of dollars by breaking your current mortgage and getting a new 3 year rate under 3%.

In the last week I have done this for 5 families saving them between $4,200 and $7,900 with no money out of there pocket. Conversely a couple of families have taken a lower payment instead ensuring that there end balance is the same. And yes, this is after penalties and legal fees.

Ideally you have some equity to cover the penalties and fees. 

P.S. This is a public service announcement giving those in this community an opportunity to save some cash. Please don't think I am trolling for clients because right now I have lots. If you need me to do some math for you, let me know. 

I have a 5 year mortgage that is coming up for refinancing Nov. 1st 2012. We locked in at 5.6 and want to profit from a present 2.5% rate. We were informed the fee to break it will be $9,726.31. That is the balance of the interest we would pay on the mortgage I assume. What can we do?


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