Homeowners in good fiscal condition who wish to ease the monthly load of a mortgage might want to investigate payment. Some mortgages, however, carry prepayment penalties. These penalties vary with the loan contract and, typically, gradually decrease as more years of repayment are finished.
Significance
By legislation, mortgage contracts must state clearly the prepayment penalty attached to the loan. Lenders intending to market their mortgages enforce this penalty because prepayment, which ends the stream of interest payments, which makes the loan less beneficial to prospective institutional buyers.
Requirements
The prepayment penalty might be imposed in the event the home is sold and the remainder paid off. It might also be enforced in the event the debtor negotiates another loan to refinance the primary balance. If interest rates drop and the debtor seeks out another loan to refinance, but the savings in interest payments might amount to over the prepayment penalty.
Penalties
Prepayment penalties amount to a proportion of the outstanding balance, or an amount equal to a specific number of months of interest payments. Bear in mind that interest payments are higher in the earlier years of this loan, and principal balances decline very gradually. The prepayment punishment declines because the mortgage ages. Nearly all prepayment penalties evaporate by the fifth year of this mortgage.
Limited Prepayments
If you don’t intend to pay off the mortgage entirely, remember that the mortgage contract will permit a limited number of prepayments per year without penalty. A normal maximum amount is 20 percent of the outstanding balance. These prepayment penalties could be negotiated after making an application for financing, not after the mortgage contract is signed.
Negotiation
Lenders may be willing to reduce the interest rate in the event the borrower accepts the prepayment penalty clause. This choice is usually available to borrowers with good credit and who would easily qualify for the loan anyway. Subprime borrowers who must pay higher interest rates usually are needed to take a complete (and large ) prepayment penalty.
Prepayment Penalty Prevention
Discuss prepayment options as soon as you start applying for financing. At final, read your mortgage contract carefully. Lenders might have inserted prepayment language within this document which you were not aware of, and you won’t find the full text of this contract before the closure.
