There are some who say to never do a mortgage refinance if there is a prepayment penalty involved. Others will steer you toward one anyway, regardless of the terms of the penalty. The right answer is to perform a financial analysis to see which path makes financial sense, taking into consideration your future plans and the terms of the new mortgage.
There can be valid reasons to do a mortgage refinance despite a penalty. For example, if you can reduce your interest rate where your savings over the time period of the new mortgage exceeds that of the penalty, it makes sense to proceed. Keep in mind that this assumes you will remain in the home long enough to recoup the penalty payment, and it works best if the new loan does not also have a prepayment penalty you could face down the road. If it does have a penalty, you should factor that into your financial analysis to see if the mortgage refinance still makes sense.
Another thing to consider is how much time you have left on your mortgage and what time period you’d obtain for your mortgage refinance. For example, if you have only 5 or 10 years remaining, do you really want to start over with a 15- or 30-year mortgage? On the other hand, if the interest savings actually let you shorten the time left, such as taking one with 20 years remaining and being able to do a 15-year mortgage instead, that is a move in the right direction. The only way to know for sure if a mortgage refinance makes sense with a penalty involved is to sit down and do the math.
At Donna Mullen & Associates, we are happy to help you with that and perform a review of your existing mortgage to be sure there aren’t any other restrictions you need to know about before proceeding with a mortgage refinance. Reach out to us today to learn more.