 Refinancing
with a prepayment penalty
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 Dear
Dr. Don,
I currently have an interest-only mortgage with a prepayment penalty
through June 2007. My mortgage broker has suggested that I refinance
this mortgage as my credit scores have increased. He is telling
me I will have a lower payment now on a 30-year fixed rate mortgage
at 6.375 percent than I would if I waited the year until the penalty
is up.
His rationale is that interest rates will probably be between 7
percent and 7.5 percent for the same 30-year loan a year from now.
I am planning on keeping my home long term. Is this the correct
way to look at this and should I do the refinancing now? Thanks.
-- Howard Homeowner
 Dear
Howard,
Congratulations on improving your credit scores. If you agree with
the broker's interest-rate outlook, then it's a good idea to at
least run the numbers on refinancing your home now and paying the
prepayment penalty.
A prepayment penalty is just one more closing cost
to consider in a refinancing. It pushes the payback period on the
refinancing out a bit further, but it can make sense if you plan
to be in the home long term and you expect interest rates to go
higher between now and when the prepayment penalty expires.
The payback period divides the cost of refinancing
by the reduction in monthly payments. If the refinancing will cost
you $10,000 in all, and your monthly payment goes down by $250 per
month, then the payback period is 40 months. Use Bankrate's refinancing
calculator to figure out the payback period.
A Bankrate Tax
Talk column discusses your ability to deduct the prepayment
penalty on your federal income tax return, but you should talk to
your tax adviser about the tax impact of refinancing.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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