Paying Mortgage Prepayment Penalty To Refinance

by Tony from Brantford, ON

Will paying a mortgage prepayment penalty to refinance 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.

Example:
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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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,




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Riveting Fixed Rate, Hybrid and Adjustable Rate Mortgage Help

Assure yourself of the lowest fixed payment possible with this best fixed rate mortgage yet pay it down as quickly as you like.

The 15 year fixed rate mortgage will save you thousands and thousands of dollars in interest over the years. 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 the security of a 30 year fixed home loan enhanced by a slightly lower interest rate.

I've heard it referred to as boring but I crown the 30 year fixed rate mortgage King Of Mortgages!

The 40 Year Fixed Rate Mortgage - When fast mortgage pay offs may not be for everyone.

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

Imagine what it would be like if you could plan for changes to your adjustable rate mortgage.

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

Come on Kate! Aren't interest only mortgage loans just hidden adjustable rates?

Ask Kate About ARMs - Ask a question to get an answer from Kate about mortgages that adjust.

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

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