 Refinancing
with a prepayment penalty
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 Dear
Dr. Don,
I refinanced my home in November of 2005. I got a variable rate
loan tied to an index (LIBOR). It's a 30-year mortgage with a two-year
balloon. I've since discovered that the mortgage has a prepayment
clause that penalizes me if I refinance the loan before the balloon
date. My question is, should I try to refinance before the balloon
date and pay the prepayment penalty or should I hold out until the
balloon date?
-- Shirley Structure
 Dear
Shirley,
The structure of your type of mortgage is generally
used when the borrower has a weak credit rating. Establishing a
good payment history on the mortgage over the first two years improves
your credit score to the point where you can refinance at a better
rate.
You're less than six months into this mortgage. It's
not likely that the payment history on this mortgage has done all
that much to improve your credit score, but that's easy enough to
check if you're willing to purchase your credit score to see where
you stand.
While you can get one free
credit report each year from the credit bureaus, you still have
to pay for a credit score.
I wouldn't recommend buying your credit scores from
all three credit bureaus. Pick one and check for improvement. Bankrate
provides the contact
information. Bankrate has also partnered with myFICO to offer
a free
credit score estimator. It'll give you a credit score range
but doesn't provide an exact scoring.
There's no finessing the prepayment cost and, unless
you see some improvement in your credit score, you're not likely
to see a better interest rate on the refinancing. That makes refinancing
now an expensive proposition. Read your loan documents or talk to
your lender about the size of the prepayment penalty and how it
is calculated. Don't forget the closing costs you'll have to pay
on a new fixed mortgage.
Both fixed and variable mortgage rates are likely
to trend higher over the next year and a half, but building a better
credit history is likely to get you a better interest rate than
you could qualify for today.
Bankrate's refinancing
calculator can help you decide if it makes sense to refinance
by incorporating closing and other costs into the picture.
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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