| Prepayment penalties are one of those mortgage | | | | forever; typically they expire after five years, when |
| terms most people don't know about. Prepayment | | | | the lender has made their money back. Many |
| penalties aren't a problem unless you didn't know you | | | | penalties also shrink over time as well. |
| had one and were preparing to sell or refinance your | | | | One also can get hit with a prepayment penalty in |
| home in a short period of time and got hit with it. | | | | other ways, beyond paying off your mortgage early. |
| So what is a prepayment penalty? Many would think | | | | Some lenders will make the penalty kick in if you try |
| paying off a loan or debt early is a good thing and | | | | to pay your loan off faster by making additional |
| that this is what a lender wants to see. But in the | | | | payments. But this is less common as you would |
| world of mortgages and home loans, the cost of | | | | have to pay off at least 20 percent of the balance in |
| loaning money to another is recaptured often at the | | | | a single year. This is a called a penalty for accelerated |
| front of the loan or within the first years. Therefore, | | | | payments. |
| if somebody pays their loan off too quickly or | | | | Another reason you may be asked to pay a |
| refinances it, the lender could lose money. To cover | | | | prepayment penalty is if you obtain a sub-prime loan. |
| themselves, many lenders ask for the borrower to | | | | If you have bad credit then you are considered a |
| agree upon a prepayment penalty clause. | | | | sub-prime borrower. Your risk is higher and sub-prime |
| Prepayment penalties are also known as cancellation | | | | borrowers profit from refinancing if their credit rating |
| fees. This penalty or fee is assessed for paying off | | | | improves, even if the mortgage rate does not |
| part or all of your mortgage ahead of schedule. | | | | change. |
| There was a time when it was difficult to know if | | | | With that said, there are two types of penalties. |
| you had one of these clauses tacked on to your | | | | There is 'hard' and 'soft'. A soft prepayment penalty |
| loan, but today, with the new Truth In Lending Form, | | | | is not imposed if you sell the home or make |
| lenders are required to declare whether a mortgage | | | | accelerated payment but only goes into effect if you |
| includes a prepayment penalty or not. | | | | refinance your home into a new mortgage within the |
| What is the good and bad of prepayment penalties? | | | | first few years. A hard prepayment penalty on the |
| The good is that if a lender puts this in your | | | | other hand is imposed regardless of the reason. |
| agreement, they are also possibly willing to offer you | | | | Prepayment penalties are not often waived. If you |
| a lower mortgage rate or what is called a 'cost-free' | | | | do not believe you will be in your home for a long |
| mortgage, where you pay nothing up front and the | | | | period of time, if you are flipping a home or are |
| closing costs are rolled into the loan itself. The cost | | | | somebody who moves a lot, you will want to double |
| of having such a mortgage in prepayment penalties is | | | | check whether or not you have such a clause on |
| usually around 2 to 4 percent of the loan balance. So, | | | | your loan before signing the papers. For you, it might |
| if your loan is $200,000, 2 percent of this will be | | | | be more worth the cost to pay up front rather than |
| $4,000. | | | | at the end. |
| But don't despair, prepayment penalties are not | | | | |