HEN a homeowner contemplates refinancing a mortgage, the critical calculation is whether the lower interest rate being offered will produce net savings quickly enough to justify the cost of obtaining the new loan.

And while that same consideration applies when a co-op corporation is refinancing the mortgage on its building, other factors often come into play. Among them are whether the existing mortgage carries a prepayment penalty and, if so, whether there is anything that can be done to avoid or minimize it.

"There are three basic reasons for a co-op corporation to refinance," said William J. Rank, a certified public accountant in Purchase, N.Y., who specializes in co-ops and condominiums. "One would be to obtain a better rate; the second would be to borrow additional money; and the third would be because the current mortgage is nearing the end of its term."

Mr. Rank said that when a co-op is created, the co-op corporation becomes the owner of the building. And in most cases, he said, a mortgage is used to pay for the purchase.

That mortgage æ called an underlying mortgage æ is for a specific amount of money lent over a specific period of time, with interest. In most cases, however, co-ops' underlying mortgages are not like 15-, 20- or 30-year "self-amortizing" residential mortgages, which are fully paid at the end of the term. Instead, Mr. Rank said, many co-ops take out 10-year interest-only mortgages, in which the entire amount borrowed is still due at the end of the term.

Other co-ops, he said, take out a "balloon" mortgage; that is, while the mortgage repayment schedule may be based on, say, a 30-year amortization schedule, the unpaid balance of the mortgage is "due and payable" in, say, 10 years. "And that balloon payment usually has to be refinanced," Mr. Rank said, adding that when this is done, he advises clients to take out a fixed-rate self-amortizing mortgage that does not have a balloon payment at the end.

In fact, if a co-op is refinancing because the term of the mortgage is about to expire æ or because it needs funds for repairs or capital improvements æ the co-op is pretty much stuck with settling for the best deal it can get at the time it needs the money. And while terms may be good now, they may not be so great a year from now.

In situations where the main reason for the refinancing is that current interest rates are favorable, it would appear the co-op would be is in a better bargaining position. After all, one might assume, the co-op can simply negotiate a new deal with its current lender or find a more reasonable source of financing.

But that assumption may not always be correct.

"Everybody likes to refinance when the rates are down," said Jerome L. Liebowitz, a co-op lawyer in Fort Lee, N.J. "But banks are not stupid."

Mr. Liebowitz explained that most co-op underlying mortgages contain what is known as a prepayment penalty, which penalizes the borrower if he pays off the loan before its term expires. Traditionally, Mr. Liebowitz said, prepayment penalties were calculated as a percentage of the outstanding balance of the mortgage imposed on a declining scale.

In other words, if a 10-year mortgage was refinanced with, say, five years remaining on the original term, there would be a prepayment penalty of 5 percent of the loan balance.

If the refinancing occurred with four years to go, the prepayment penalty would be 4 percent; three years would be 3 percent, and so on. Using that formula, it is fairly easy for a co-op to determine whether it makes sense to refinance; the amount of the prepayment penalty æ fixed at a predetermined percentage æ simply becomes an additional cost of the refinancing. If the difference in interest rates is big enough, a refinancing may make sense even with the prepayment penalty.

In the early 1990's, however, co-op lenders changed their strategy. Rather than impose prepayment penalties based upon a percentage of the outstanding balance, the lenders instead started writing "yield maintenance penalties" into their mortgages. "That basically means that if you want to prepay the loan, you're going to have to pay the lender whatever it would lose as a result of the prepayment," Mr. Liebowitz said.

In other words, no matter how much lower the prevailing interest rate is than the interest rate on the mortgage, the yield maintenance penalty provision assures the lender of being paid every penny it would have earned for the entire term of the mortgage, even if the mortgage were paid off ahead of time. "The formula for yield maintenance is extremely stiff," he said. "In some cases, the penalty can be in excess of $1 million."

In fact, the more interest rates drop below the rate being charged on the mortgage, the greater the yield maintenance penalty will be.

Michael J. Wolfe, president of Midboro Management, a Manhattan management company, said that if an existing 10-year interest-only mortgage with a 8 percent interest rate had one year left, the yield maintenance penalty provision would allow the lender to determine how much it would lose if the loan were paid off early. Typically, he said, the lender determines how much it can earn on the balance of the loan for the remaining number of years by investing in United States Treasury notes. Since one-year Treasury notes currently pay 2.41 percent, the lender would be allowed to penalize the borrower for the 5.59 percent difference. On a $5 million outstanding balance, that would amount to $279,500.

"We call it `death by prepayment,' " Mr. Wolfe said. He added that while the yield maintenance penalty provision can be negotiated somewhat at the inception of the loan, such negotiation normally results in a higher interest rate.

Mr. Wolfe said that yield maintenance premiums would be frustrating enough for borrowers if all refinancings involved nothing more than saving a little money by borrowing at a lower interest rate to pay off money already owed. But the penalties become truly painful when interest rates are so low that significant amounts can be saved by refinancing. And they become excruciating when the reason for a refinancing is not just to refinance the mortgage, but to raise money needed for repairs or capital improvements in the building.

"If today's rate is 6.5 percent and you have a year left to go on your current 8 percent mortgage, do you really want to roll the dice and wait?" Mr. Wolfe said. "If you prepay now, the prepayment penalty could be enormous. But if you wait a year, interest rates could be back up to 8 percent."

As it turns out, however, there may be some room for borrowers to maneuver. "There is a very interesting solution to this dilemma," said Gregg Winter, president of Winter & Company Commercial Real Estate Finance, a Manhattan mortgage broker. Mr. Winter said that in a number of Recent Transactions, he has been able to get a "forward commitment/early rate lock" for customers who may have to wait as long as a year before they can refinance their mortgages without paying a penalty.

"We're working with one building now that has locked in a rate of 6.87 percent on a new 10-year fixed-rate loan," Mr. Winter said. "And we've timed it to dovetail with the expiration of their current mortgage."

There is a price to be paid, however, for being able to lock in a low current rate for a number of months. Generally speaking, Mr. Winter said, that price translates into an interest rate increase of two to three "basis points" per month of rate lock. A basis point, he explained, is one-hundredth of a percentage point. This means that if a rate is locked for 12 months, the borrower will pay an additional 24 to 36 basis points in interest æ or roughly one-quarter to one-third of a percentage point more. In other words, if the current interest rate is 6.5 percent, a borrower with a one-year forward commitment/early rate lock will end up paying 6.75 percent to 6.83 on the mortgage when it is taken out a year from now.

"In most cases, the borrower has to post a good-faith deposit of 2 to 3 percent of the loan amount," Mr. Winter said. "If the borrower walks away from the deal, he forfeits the deposit. If he takes it, the money is refunded when the loan closes."