Paying Mortgage Prepayment Penalty To Refinance

by Tony from Brantford, ON

Ask Kate if paying a mortgage prepayment penalty to refinance will be worthwhile: Hi Kate, I am 2 years into a locked in 5 year mortgage at 5.09%. Would it make sense to try to break my mortgage and pay the penalty for a lower mortgage rate? Tony

Kate Answers: Paying Mortgage Prepayment Penalty To Refinance

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Dear Tony, Here is what I'd do to explore this idea.

1 -- Taking today's mortgage rates and using this mortgage rate calculator, I'd figure out what my payment would be if I refinanced.

2 -- Then subtract the estimated amount from your current house payments. Remember to back out taxes and insurance from both figures.

3 -- Next calculate how much is left owing on your prepayment penalty. Prepayment penalties vary so review your final loan documents or call your mortgage servicer's toll free number to ask.

4 -- Now divide the prepayment penalty by the monthly amount you will save if you refinance. That number equals how many months of lower mortgage payments it would take to make up for paying a prepayment penalty.

Your current principal and interest payment is $1200 but by refinancing it would go down to $1000. That is a $200 a month savings. However if you refinance today, the amount you'd need to pay for the prepayment penalty is $3000.

So take $3000 and divide it by $200. That equals 15 months to break even. ($3000 penalty/$200 refinance savings = 15 months)

Factor in the benefit of switching from adjustable mortgage rates to fixed rates. Of course this is not a numerical figure but does bring peace of mind. Only you know how much this is worth to you.

Another Reason - Paying Mortgage Prepayment Penalty To Refinance

Here is another reason for paying a mortgage prepayment penalty to refinance. Will mortgage rates go higher? No one knows this answer but take the possibility into consideration.

But let's flip the coin and say perhaps you plan to sell the house in a year. You may find this exercise telling you to sit tight and not refinance.

There generally isn't one right answer so study the facts and try to figure the best answer for you.

At the bottom of this page, I have provided links to more fixed rate mortgage tips for your convenience. After reading through the pages, please let me know if you have more questions.

Take a moment to bookmark Paying Mortgage Prepayment Penalty To Refinance to your favorites and visit often for more refinancing tips. You can also invite friends to comment on this page or ask another question of their own like you did.

And visit this page Best Mortgage Rates And Refinancing to see more letters contributed by Readers just like you! I answer each contribution with unique refinancing tips of course.

Best Wishes,

Ask Kate

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Riveting Fixed, Hybrid, and Adjustable Rate Mortgage Help

Comparing Fixed and Adjustable Rates - Refinancing? Buying a house? Get current rates right here.

Get the lowest payment with this best fixed rate mortgage plan yet pay it down quickly.

The 15 year fixed rate mortgage will save thousands plus you'll be mortgage free after 180 payments!

What would you do with an extra $87,789? Meet the 20 year fixed rate mortgage.

Introducing the 25 year fixed rate mortgage combining security with a lower interest rate.

I crown the 30 year fixed rate mortgage King Of Mortgages!

Meet the 40 Year Fixed Rate Mortgage when fast mortgage pay offs aren't your cup of tea.

Are adjustable mortgage rates good or bad? It depends on your circumstances.

Plan for changes to your adjustable rate mortgage.

If the cheapest fixed rate mortgages will save you money, why pay for more?

Are interest only mortgage loans hidden adjustable rates?

Ask Kate About ARMs - Get an answer about mortgages that adjust.

ARM Ask And Answer - Questions about adjustable rate mortgages, each with a individual answer from Kate.

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