Mortgage Prepayment Penalties - Just Say No
One of the most common terms found in a new home loan is a prepayment penalty. This type of penalty says that if the
borrower pays off the loan early, commonly during the first five years of the loan, then the borrower will be responsible for
paying an additional amount of money, typically about six months interest on 80% of the mortgage balance. Sub-prime market loans
will typically carry prepayment penalties more than standard mortgage loans.
You may plan on keeping the house for the entire duration of the prepayment penalty, and be tempted not to worry about it
much. But sometimes life circumstances change, so it's wise to avoid any type of prepayment penalty if you can. A typical
prepayment penalty might equal five months worth of monthly loan payments, so it's worth checking on. Of course, you should always
ask (before you sign) if a new loan has a prepayment penalty. In fact, ask the lending officer to point out to you in the document where a prepayment penalty is discussed.
Most items in a loan are subject to negotiation. If you
haven't signed loan papers yet, and you find that your loan has a
prepayment penalty, you might offer to pay an additional closing
point or so to see if it can be removed. The key at this stage is
that if you agree to the prepayment penalty, you should try to
find ways to reduce either the amount, the term, or both as much
If you already have a loan, you are bound by the terms of the
document, unless you can negotiate them. There are perfectly
legitimate reasons why you may want to pay off a note early -
most often, due either to refinancing or selling the house. You
may be able to contact your lender to see if they will waive the
prepayment penalty if they are able to provide refinancing. If
interest rates have dropped a lot, and you can't get out of the
prepayment penalty, it may be worth rolling that amount into a
new loan. And of course, try to get the new loan without a
About The Author
Jakob Jelling is the founder of http://www.cashbazar.com. Visit his website for the
latest on personal finance, debt elimination, budgeting, credit cards and real estate.
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Closing on a property is a very challenging time for a
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It is likely to be one of the largest purchases of your
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