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Mortgage Prepayment Penalties - Just Say No
By Jakob Jelling
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 as possible.
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 prepayment penalty.
Jakob Jelling is the founder of http://www.cashbazar.com (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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