Is it a good idea to refinance my home, if there is also an early penalty for early payoff?

Question

I have only been in the home for six months, but, I have a horrible interest rate of 11.2% and my monthly payments are too high.

Answer 1

Hey Jennifer,
It sounds like you should definitely get out of that mortgage, 11.2% is awfully high. However, what is the reason that you had to take an 11.2% loan with a prepayment penalty? It sounds like a sub-prime loan product that you are currently in. Did you have a recent bankruptcy, foreclosure, etc? Is the credit bruised? Why are you in that situation?

As far as whether or not it makes sense, this is what I recommend:

Go to a few different mortgage lenders. Have them pull your credit and pre-qualify you. Figure out what kind of loan program and interest rate you can get, then do the math from there. Take into consideration how much you will have to pay to get out from underneath this loan, add to that number the amount that your prepayment penalty is (they're usually one percent of the original loan amount). Then, divide how much you will save by refinancing now into the cost to do the loan. That will give you a break-even period in months. That should give you an idea whether or not it makes sense. For instance, if your prepayment penalty is $1,500, the cost to refinance is $2,000 but your monthly savings by refinancing are $100, then you will break-even on your cost to refinance in approximately 35 months. That's almost 3 years... Will you be in that house for more than 3 years? If so, then it might make sense.

Hopefully this helps... Good luck!

Answer 2

You should probably talk to a financial adviser and go over the details with someone that knows what they are doing. Basically it depends on how much your early pay off penalty is and how much you will save in the long run by refinancing. It is always good to use an amortization calculator to see what is really going on. You can end up paying 3-4 times the purchase price of a home when there is a high interest rate and a note that is financed for many decades. Again I would talk to a financial adviser and get solid advice. Look at www.bankrates.com for an amortization calculator.

Answer 3

You need to consider many factors such as:

How long do you intend to stay in the current house.

How many months will it take (based on your monthly payment savings) to recoup the amount of the penalty?

How does the refinancing impact your equity stake (percent you own vs. the loan amount) and the current market value of your home.

Lastly, look at the specific language of the early payment penalty. In some cases, the penalty is a percentage of the loan balance at the time of pay-off. If you could structure your re-financing so you can pay down the current mortgage significantly, the remaining low balance amount will minimize your penalty amount.

If that does not work, try and refinance with your exisiting bank, they might give you some relief if they are keeping your business.

Answer 4

If you can't affors your monthly payments, and your refinancing loan will take care of the early penalty, then you should do it. Depending on your interest rate and penalty size, you may actually pay less in the long run. 11.2% is crazy for interest rate on a home.

Good luck.

Answer 5

If you have a prepay penalty it will be even more costly for you to refinance; keep in mind that refinancing has its own costs too.

Also, in 6-months, your debt to income ratio and credit scoring will not necesasrily have changed so much which is why your were penalized with a high interest rate since your credit risk was higher than average.

You are living beyong your means and you really should have bought a cheaper house.

Answer 6

if your rate is 11.2% I would def. do it. Do a 30yr fixed. DOnt do an ARM if you plan on staying put. Just make double payments every so often and you will be fine.
Usually if you pay off your mortage there are no penalties. You just need to check with whomever you take the loan out with.
Try mortgageselect.com

Answer 7

No look at your amortization time table, for the 1st 5 to 7 years your paying extra often than not activity. pay off the abode as quickly as possible then make investments the mark downs in CD's. on your amortization time table on the tip of 15 years it is going to coach you techniques lots you surely paid for the abode and additionally you would be shocked.