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
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.
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