Residential Real Estate:

Prepayment Penalty

Mortgage contracts often come with prepayment penalties. The contract states that if the homeowner pays off the loan before the term expires, a penalty will be paid. Many prepayment penalties expire after 5 years. However, predatory lenders hide them in their contracts with no expiration.

The sum of the prepayment penalty can be quite a lot. The amount the lender will charge you is often 6 months worth of interest. This interest is generally calculated on 80% of the mortgage value. If you work with a bad credit lender you can expect to see severe prepayment penalties in your loan contract.

If you know that you will not be moving or needing to refinance, a prepayment penalty can be easy to deal with. If you do need to sell or pull out equity by refinancing however, 6 months of interest payments can be hard.

Much of your mortgage contract is up for negotiation. If you have not finalized the loan contract, ask the lender to remove it. The prospect of losing your loan over a prepayment penalty is often enough for many mortgage lenders to remove it. If your mortgage lender will not remove it, offering to pay points up front may be worth your while. You could receive a lower interest rate and have the prepayment penalty removed from your mortgage contract. If the lender will not remove the penalty and you do not wish to find another mortgage, try bargaining to have the amount of the penalty or the duration it applies lowered.

There are enough mortgage lenders in the market willing to underwrite loans without prepayment penalties that you should be able to find a mortgage that does not come with one. To find the best deal for your mortgage you need to do your homework and shop around.