Prepayment fees put refinance on hold

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Dear Dr. Don,
We refinanced our house at 9.8 percent for two years just to keep us in the house. We have a prepayment penalty of $11,300 if the mortgage is paid off before this October. I’m wondering if we should refinance now, paying the prepayment penalty with a lower interest rate, or wait until after the penalty expires taking the chance that interest rates (will) go higher. What do you think the chances are that interest rates will go to 5.5 or higher by then?
— Linda Long-Odds

Dear Linda,
I try to stay out of the interest rate forecasting business. There’s no upside for me to go out on that limb. That said, you can keep your finger on the pulse of where interest rates are and where they might be headed by reading Bankrate’s weekly “Rate Trend Index” and “Mortgage Analysis” features.

As I write this column, Bankrate’s national average for a 30-year, fixed-rate mortgage is 5.2 percent.

Is it likely that mortgage interest rates will be higher in the fall than they are now? I think so. But will they be high enough that you are better off refinancing now and paying the prepayment penalty? I doubt it.

Paying an additional $11,300 on top of closing costs is going to make it very hard to justify the refinancing before the October expiration of the prepayment penalty. You can use Bankrate’s “Savings from refinancing” calculator and input the prepayment penalty as an additional cost to see how that affects the savings if you refinance now.

Even if interest rates head higher, you should be so much better off than your current 9.8-percent mortgage rate that you’ll realize substantial interest savings in refinancing in the fall. Spend the time between now and then working on making sure you have as good a credit history as possible.

October’s not that far away. Discuss your ability to lock in a rate on the refinancing with a mortgage lender or a mortgage broker. It’s common for lenders to offer a 60-day rate lock, but you also should be able to find a 120-day rate lock. However, you’ll pay a premium for the rate-lock extension.

If you decide to work with a mortgage broker, I recommend working with an “upfront mortgage broker” as described by The Mortgage Professor, Jack Guttentag, in the Bankrate feature “Want your mortgage wholesale? Try an upfront broker.”