Do you have any equity in the house? If so, look to refinance immediately. If your credit is halfway decent and you can document income, you can likely consolidate both loans to a much-lower fixed rate with no prepayment penalty.

First of all, the prepayment penalty is tax deductible. If you wait, lending guidelines could tighten up and/or rates can go higher. Also, getting the penalty waived may be a possibility.

If you are “upside down” (owe more than the house is worth), you should contact the lender NOW to try to re-negotiate (they don’t want to foreclose unless they have no choice), and if that fails, I know a nice woman that does loan mitigation.

Yes, it is possible to do a short sale Refi. I would speak with your current lender to explore a forbearance as well. If you have genuine hardship, they will work something out with you. Do some research and find a reputable loan officer in your area with alot of expirience if you decide to go the refi route.