Should I Refinance?

Breaking a mortgage mid-term triggers a prepayment penalty, and the type matters enormously.

On a variable rate it is normally three months' interest — on a $400,000 balance at 3.60%, roughly $3,600. Manageable.

On a fixed rate it is the greater of three months' interest or the interest rate differential (IRD). IRD calculations vary wildly between lenders, and some use posted rates in a way that produces penalties several times larger than a straightforward calculation suggests. Five-figure penalties are common.

Never estimate this. Call your lender and ask for the exact figure in writing — they must provide it — then run the numbers.

Add every cost of moving: the penalty, legal fees, appraisal, and any discharge fee. Then work out your monthly saving at the new rate. Divide the total cost by the monthly saving and you get the number of months to break even.

Compare that against the time remaining in your term. If you break even in 14 months with three years left, the move is clearly worth it. If break-even lands past your maturity date, waiting for renewal is the better answer — and at renewal you can switch lenders with no penalty at all.

Refinancing rarely pays when your term ends within about a year, when your rate is already close to current pricing, or when the fixed-rate IRD penalty is large.

It often does pay when you are consolidating high-interest debt — the interest gap does the work regardless of penalty — or when your payment has become genuinely unaffordable and extending amortization avoids a forced sale.

If you are only chasing a better rate and your renewal is near, hold. Start shopping 120 days before maturity instead. Estimates only, O.A.C.