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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


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