Whenever you buy a home it can be a pretty exciting albeit stressful time. You may be tempted to skip the fine print and rush through the paperwork as quickly as possible to get it over with so that you can receive the keys to your new dwelling. It’s a good idea to resist this temptation because it could cost you money in the long run.
One of the items that’s commonly missed on mortgage agreements is the prepayment penalty. So many people needing to pay off their mortgage are awakened to reality when they find out that there is a prepayment penalty clause buried within the fine print of their documents.
You probably don’t even remember if your loan officer went over it during your loan closing. Sometimes these things are talked about during the closing but the loan officer only mentions them very briefly and vaguely before he rushes you on to other things within the contract that you probably won’t object to as much.
A prepayment penalty clause states that if you pay off your mortgage loan before the maturity date then you will be accessed a prepayment penalty which is expressed as a percentage of the outstanding balance. This percentage, depending on your mortgage, could range from 3% to 20%, and it applies to your outstanding balance at the time of the payoff, not the original balance.
Thankfully this prepayment penalty is not existent throughout the life of the contract. Most prepayment clauses will disappear after 5 years. The reason why mortgage lenders have prepayment penalties is that it is to their advantage.
During the early years of the mortgage loan you are paying the most interest, therefore, it would be advantageous to the lender to have you remain on their books during that time so that you continue to pay the most finance charges. If you decide to pay off before the five years have elapsed then you are subject to a huge penalty.
If your mortgage loan balance is $100,000 at the time of payoff and your prepayment penalty is 5% then you are looking at $5,000 as your fee. That’s a lot of money to have to pay because you failed to discover this clause within the fine print.
Sometimes lenders will offer you a lower rate if a prepayment clause is in your mortgage agreement. You have to put some figures together to see if this is going to be beneficial to you. Prepayment penalties in some cases will be assessed even if you sell your home. That’s why it’s important to get all the details.
I used to work for a bank and so many customers would call in for a payoff when I told them they had a prepayment penalty they would argue for days on end.
Finally, I would direct them to their loan documents and they would really become irate. When a lender accepts a prepayment penalty it is helping them recoup the interest that will be lost from the customer not staying on the books for the entire term of the loan.…