Prepayment
Penalty
A
prepayment
penalty is the penalty the lender
charges you for paying
off your loan early. The penalty is normally 3% of the amount of the
loan, and sometimes higher depending on the lender or the state. Prepayment
penalties are also charged in the form of six months interest.
The
prepayment penalty time frame is usually up to three years.
Most
people don’t plan on selling their homes within that three-year
time frame, or have the cash sitting around to just go ahead and pay it
off, so this may not seem like an issue at first glance. However, this
is a problem if you want to refinance
for a lower rate and payment.
When
signing your loan disclosures
the lender sends you, make sure you scrutinize the promissory
note. This is the form that makes you aware of any pre-payment
penalty clause in your loan. If your lender has told you there is
one, than the promissory note will explain the details. However, if you
have been told there will not be one, make sure it states this, and states
it matter of factly before you sign the loan documents at closing. You
wouldn't want a pre-payment penalty finding it's way into your mortgage
based on a frivolous clause that was not explained to you. Keep in mind.
Prepayment penalties are not permitted on FHA,
VA,
and FMHA mortgages
Some
states have passed laws from prohibiting lenders from imposing prepayment
penalties on their customers. The lenders, in turn, decided to charge
higher rates. Go figure!
Prepayment
Penalty Part 2
Points
Good
Faith Estimate
Origination
Fees
Payments
Toward Principal
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