What Is a Prepayment Penalty?

By
Services for Real Estate Pros with W. Darrell Walters

A prepayment penalty is a fee charged to borrowers that make full payment on their mortgage, or pay off a substantial portion (generally anything exceeding 20% of the total loan amount), ahead of schedule. This is a clause written into some contracts to protect the lender’s book of business in exchange for providing a lower interest rate, or for providing financing to a high-risk borrower.

Prepayment penalties vary with different lenders, but generally apply to a one-, two-, three-, or five-year period ofPrepayment Penaltytime. This fee can be expressed as either a specific number of months’ interest or a percentage of the outstanding balance. A ‘hard’ prepayment penalty applies to either the refinance or the sale of a property. A contract written with a ‘soft’ prepayment penalty permits the borrower to sell their property without incurring a penalty, but does restrict refinancing for a set period of time. It is important for the consumer to know that a prepayment penalty is the borrower’s choice and should never be considered a requirement!

Make sure you are working with a reputable loan professional who is aware of your long-term plans before consenting to sign off on an agreement that includes a prepayment penalty! Always ask for a written evaluation of your loan options.

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Topic:
ActiveRain Community
Location:
Georgia
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prepayment penalty
mortgage terms

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Rainmaker
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Debbie Holmes
Gets the job done!
Gold Key Real Estate

I haven't seen a prepayment clause in a few years.  I hope most of them have expired....

October 28, 2011 09:51 AM
Rainmaker
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Richie Alan Naggar Author PEARLS SERIES of books
on LIFE and LOVE plus Real Estate too!
People first then business! Ran Right Realty Riverside, Ca

When they were out and about, I hated them. There was always a battle over including/excluding them

October 28, 2011 09:54 AM
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Rainmaker
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Darrell Walters

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