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Hi maskedman,

We've got a 8 percent ARM from just about exactly 2 years ago (seems kinda high, doesnt it?) It was the best we could do, first time buyers and all that. Unfortunately, when we recently went for a refinance, we learned that our current lender charges a 6% fee if you pay off before the first three years.

OUCH... but you're certainly not at all alone! You were stuck in a hell of a bubble. Shoot... if rates hadn't come back down, it wouldn't have even been considered "hell"... it's all perspective!

There's no way around this, is there? Is there a realistic scenario that would make paying the penalty actually to our benefit?

Well, there's no way around paying the penalty, BUT there may be some salvageable benefits available;

Since prepayment penalties are 'guaranteed interest' to the lender, when they are incurred they are tax deductible that year. IOW if you had a 5 year prepayment penalty, and you refi at the 2nd year, the penalty can be deducted as interest costs on the old loan all in the year of the refi, rather than over the life of the ammortization of the old loan.

Better than a poke in the eye... but not much better...

I'm really quite disappointed (especially now, with rates even *lower*!) that I can't take advantage of current market conditions. Not only that, but our home was appraised at close to 50% more than our purchase price, and the hundreds of dollars we're paying in PMI just gall me.

The GOOD news is that you MAY be able to deduct these costs, in part, twice!

Once this year, as they are interest costs incurred in the old loan yet to be deducted.

A second time, in the way of mortgage interest deductions on the new loan, if you finance them into the loan itself.

OK... so that's not a lot better then the previous poke in the eye,huh?...

How about this thought; the prepay penalty ends up eating a little of the appreciation you gained in return for providing some emotional certainty you desired 2 years ago.

There are much worse challenges to have...
Dave Donhoff
Foolish Mortgage Broker
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