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Pre Payment Penalty

What Is a Mortgage Pre Payment penalty?

A pre payment penalty states that if you decide to payoff your mortgage in full, you will have to pay a penalty to the lender.

The amount of the prepayment penalty is determined by a percentage of the outstanding balance at the time of the payoff. Or it is determined by a specific number of months worth of interest. Six months interest is usually the norm.

Pre payment penalties occur if you decide to pay off the loan within the first couple of years of the mortgage term. Usually a pre payment penalty will last no more than five years, than they are gone for good.

The pre payment penalty is contractual with the lender and is part of the terms of the loan discussed before settlement. However, always ask about wether or not there is a pre payment penalty, you wouldn’t want it to sneak up on you.

Why Is There a Pre Payment penalty?

A lender imposes a pre payment penalty on a borrower in an attempt to discourage them from paying off their mortgage early by refinancing with another lender.

When this happens to a lender within the first couple of years of the term, they only stand too loose, so they impose the penalty.

Having a pre payment penalty waived during the course of the mortgage term is highly unlikely. It just is not in the best interest of the lender to waive it, just so a borrower can take their business else where.

Some states do not allow the practice of penalizing a borrower for paying off their mortgage early.


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