Payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.
If you are taking out an adjustable rate mortgage be sure to compare the length of your prepayment penalty with the date of your first interest rate adjustment. For example if you have a 2 year ARM (the interest rate will adjust after 2 years), with a 3 year prepayment penalty there is the possibility you will be forced to make a tough decision. If interest rates have gone up significantly compared to when you took the loan out you will either be forced to pay monthly payments that are significantly higher than when you first took the loan out, or pay the prepayment penalty if you choose to refinance.
Prepayment penalties are not necessarily a bad thing, you just need to consider when you are likely to move or refinance and adjust the penalties accordingly.
If you plan to stay in your home for more than 3 years, for example, you might be able to get a slightly lower interest rate if you agree to take a 3 year pre-payment penalty. As long as you don't move or refinance for 3 years, you will save money with the lower interest rate. If you have to move within the first 3 years due to an unforeseen emergency, you will have to pay the pre-pay penalty. It will be based on the amount of time left in the penalty period.
A Hard prepayment penalty means that you will incur a penalty for paying off your mortgage early regardless of whether you are selling your home or refinancing.
In most cases, you can take a minimal hit to your rate for a shorter or no prepayment penalty.
A Soft prepayment penalty will allow you to sell your home without incurring a penalty for paying off your mortgage early. If you were to refinance within the prepayment period with a soft prepayment, you would incur a prepayment penalty.
A pre payment penalty is usually six months of your mortgage payment
Some states do not allow Pre-Payment Penalties, or have modified penalties. The only exemption to this would be from a Federally Chartered Bank.
Keep in mind that a prepayment penalty allows lenders to fund loans which might be unprofitable without these guarantees. Ideally, a loan not intended to refinance within the prepayment period allow a lower rate for borrowers and less risk to the investor, a win-win scenario.
You should check if your loan has a prepayment penalty by reviewing the federal truth-in-lending disclosure you will receive from the lender when your loan application is submitted.
A prepayment penalty is will be six months or your mortgage payment. Also there are different types of pre payment penalty. Ask your loan officer which one you will have on your new loan.
The pre-payment penalty can be either 6 months of interest or 2% of the loan amount. Some lenders lower the amount of the penalty as you get closer to the pre-payment penalty end date. When refinancing, some Alt-A lenders allow to ADD a Pre-payment penalty to actually lower the interest rate (or better the pricing). If accepting a 30 year fixed, it is generally not recommended that you refinance in the first 2-5 years anyway or you'd be better off with a short term fixed rate.
When purchasing a home you intend to live in for a long period of time always take a prepayment penalty. If you keep the loan in place for 10 years or better you will save thousands over the life of the loan.
Usually the term on a prepayment term is anywhere from six months to five years.
Some states limit the application of pre-payment penalties by local or regional lenders, however national lenders will often be able to offer a loan with a prepayment penalty even in these states, and often a lower rate and or payment as a result.
