Does it make sense to pay a penalty to get a lower rate? Not always, let’s look at the following example:
Debbie has a mortgage of $200,000 with a 22 year amortization left. Her rate today is 5.15% and she has 26 months left on her term with a bi-weekly payment of $630.69. The lenders pre-payment penalty is $9,750.
Based on Debbie’s specific circumstance at the time, we were able to offer her a rate of 3.59% which would decrease her payments to $547.00. Breaking her mortgage would result in savings of $83.69 per payment or $2175.94 per year. The savings she would receive would ultimately not cover the cost of her pre-payment penalty that her lender was going to charge her. As a result, we suggested that she take the cash that she would have to pay in penalty fees (i.e., $9,750) and drop it on to her mortgage which will shorten her amortization.
Remember, a major question to consider when breaking your mortgage is “how will this impact my cash flow?” Refinancing your debt into the mortgage will eliminate high rate debts and stream line your budget even if you have to pay a penalty.