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.
__________________________
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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