A few months ago, many homeowners were refinancing their mortgages in order to capture low rates. But things have changed quickly within the real estate market. Today, "refi fever" is back, but this time, it's motivated by a desire to lock in rates before they skyrocket out of control.

When the terms of mortgages no longer look attractive, you may have a tendency to just pay them off by acquiring a new mortgage that looks better. Sometimes, this means taking your business to a different lender. Even if you stay with the same mortgage company or bank, but refinance to more attractive terms, your lender may experience a loss of revenue. In order to discourage this practice and protect their business, many mortgage companies insert prepayment penalties into their loans. These are activated if you pay off the loan too soon. If you refinance early and pay off your balance with a newer mortgage, you can get stuck with extra expenses on top of your normal refinance fees.

Benefits of mortgage refinancing

Prepayment penalties may be daunting, but they shouldn't necessarily deter you from refinancing. The crucial thing to figure out is how much those penalties will cost you over time, compared to the cost of not refinancing. For example, if you can save $10,000 over the next three years by refinancing your mortgage, and the total amount of your prepayment fees and other refinancing expenses adds up to $6,000, you can still enjoy a net savings of $4,000 by refinancing.

To calculate the impact of prepayment fees, add them up and divide by the amount you expect to save per month, after refinancing. If you anticipate an overall reduction in your monthly payments of $300, and your total refinancing costs-including prepayment fees-is $6,000, divide $6,000 by $300. The result-20-represents the number of months it will take you to break even. If you keep your new mortgage longer than 20 months, you'll start saving $300 a month, beginning with the 21st monthly payment. Using our example, you could refinance and keep your new mortgage for five years-or 60 monthly payments-and save $12,000.

Have your lender crunch numbers to give you a side-by-side comparison of your existing mortgage and the new mortgage that you're considering. If the arithmetic is in your favor, you can't go wrong, in spite of the pre-payment penalties. Trust the numbers and pick the mortgage option that allows the most savings over the time you expect to remain in your home. It can really pay to learn the new math.