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Understanding Prepayment Penalties On Home Loans
By: Dave Lewis
Mortgage lenders prefer certainty to chaos. Some lenders take this concept to
its logical conclusion in mortgages by inserting prepayment penalty clauses.
Understanding Prepayment Penalties on Home Loans
When a mortgage lender evaluates a loan application, it performs a number of
analyses to determine risk and profit scenarios. For many lenders, the analysis
is based upon a certain period where they are absolutely sure you will be paying
back the loan. To make sure this happens, they put prepayment penalties into the
loan documents. While you can still refinance, the penalties usually make it a
dubious financial decision.
Prepayment penalties are simply arbitrary provisions that require you to pay a
fee if you pay off a home loan before a certain point in time. The penalties can
be the equivalent of points, a number of payments or a set fee. There are a wide
variety of penalties because the law governing them is set by the states, not
the federal government. Since states rarely pass the same law, each has its own
set of rules on what lenders can and cannot due. You will need to check the laws
of your state or speak with a mortgage broker to figure out where you stand.
Prepayment penalties can be staggering. Regardless of the formula used to
determine them, you can expect a penalty equivalent to the maximum allowed under
the laws of your state. The lender wants you to continue to meet the obligations
of the original loan. If you try to refinance, they will want their piece of
flesh. This is true even if you must sell the property because of an emergency,
divorce, lost job or other unfortunate things that can occur in life.
Whenever possible, you should avoid mortgages that have prepayment penalty
clauses included in them. They simply are not worth the aggravation. If you must
accept penalty clauses, try to shop for a loan that has the shortest penalty
duration. Some lenders will want the prepayment penalty to apply for the full
length of the loan while others may require only a year or two. It is strongly
advised that you avoid any loan that contains a prepayment penalty for the life
of the loan. You will regret agreeing to such a loan in the long term.
Fortunately, the home loan industry is a competitive one. To compete for your
business, most mortgage lenders have moved away from prepayment penalty clauses
or at least limited their bite. Still, make absolutely sure you avoid these
brutes if at all possible.
About the Author:
Dan Lewis is with http://www.gwhomeloans.com
- a San Diego mortgage brokers
providing San Diego home loans. Visit http://www.gwhomeloans.com/services.html
to learn more about options on San Diego mortgages from a San Diego mortgage
broker company. |
