Mortgage Prepayment Penalties
By Steve Gillman - 2005
Mortgage prepayment penalties are one of the ways that banks
and other lenders have to make extra profit - at your expense.
They are not an automatic part of every home loan, however. The
article below explains how mortgage prepayment penalties work,
why they don't work for you, and how to avoid them.
Don't Pay Prepayment Penalties
Avoiding prepayment penalties in the first place is the best
way to go. Many loans no longer come with these penalties, but
be sure to ask. Then ask again, Ask in several ways. Believe
it or not, lenders are not above trying to trick you in any legal
way they can (fortunately very few ever knowingly break the law).
Ask, "What if I refinance and pay this off next year?
Is there any penalty for that?" Then ask, "What if
I make extra payments along the way? Is there any penalty for
that, and do they get applied directly and immediately to the
principal balance?" Be sure that you are able to pay off
the balance early.
You don't know what the future will bring. If interest rates
drop 2% in the next year, you want to be able to take advantage
of that by refinancing - without a penalty. If your income grows
rapidly, you may want to pay down that mortgage more quickly
- without a penalty.
The penalty for paying off the loan, by the way, can typically
be something like six months interest on 80% of the loan balance.
On a loan balance of $200,000, with 7% interest, this would be
a penalty of $5,600. That's enough to make refinancing look expensive,
But what if you already have a loan with prepayment penalties?
You might be out of luck, but maybe not. If you are refinancing
with the same lender and rolling other debt into the new loan
(so it will be larger), you might negotiate for the reduction
or even elimination of the penalty. But try to avoid any prepayment
penalties on the new loan.
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