The Good and Bad Side of Prepayment Penalties

Prepayment penalties are normally included in a mortgage contract.  Unfortunately, most homeowners do not know about this provision.  If the prepayment penalty clause is triggered, you could pay thousands of dollars which will hurt you financially.  

Technically, this is the penalty charged against you for paying off the mortgage before the specified term.  In most cases, homeowners are not aware of this provision until the lender levies the penalty.  It is very easy to overlook this clause of the contract because of the many papers that you need to sign before the closing.  But you have to take note that mortgage lenders are required by law to disclose prepayment penalty provision.  

You need not worry though because it is much easier to spot prepayment penalty provisions today.  With the new Truth in Lending form, lenders are specifically required to divulge if this provision is included in the mortgage contract or not.  The new requirements however, will not be of great use for current mortgage borrowers who may have the prepayment penalty provision in their contracts.  

Be Adept in Negotiating With Lenders

Typically, the prepayment penalty has been described as a bad thing and must be avoided by borrowers.  However, this provision is just one of the negotiating points that you need to consider when applying for a mortgage.  

You have to take note that accepting a prepayment penalty may result to lower interest payments for you.  You might also get no-cost mortgage if you accept a prepayment penalty.  No-cost means that the closing costs and other upfront fees are rolled into the entire loan.  So you need not pay anything when obtaining a mortgage.  

This provision becomes very problematic if the lender hides it beneath the pile of paper works of your mortgage.  And once you trigger the provision, you may be caught unaware that you will pay a penalty for paying off the mortgage ahead of schedule.  This is the pitfall that the new Truth in Lending form seeks to prevent. 

Pros and Cons of Prepayment Penalty

As the name implies, this penalty is imposed when you attempt to pay off the mortgage ahead of schedule.  Normally the penalty is 2 to 4 percent of the entire loan balance.  You could be hurt by this because the penalties could reach up to $4,000.  If you are going to refinance the mortgage, the savings that you may get could be wiped out by the prepayment penalty.  

But do take note that prepayment penalties are not always a bad thing.  If you intend to stay in your home for at least five years or more, then you will certainly enjoy lower interest rate payments for a mortgage loan with prepayment penalty.  This provision will also enable you to take out a loan with no upfront costs.  

To know more about prepayment penalties, you must carefully read the mortgage contract. This penalty can be a burden to you later.  However, do take note that prepayment penalties also have several advantages that favor you. 

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