What are Prepayment Penalties?

A charge the lender makes when a mortgage is repaid before a certain period of time elapses. In effect, you are "penalized" for paying off your mortgage early. Not all lenders impose a prepayment penalty. From a mortgage lender's perspective a prepayment penalty helps the lender at least recoup some or all of the significant expense it incurs in putting a new loan on the books. If the loan is to be repaid quickly, such as if you refinance it elsewhere, the lender can incur a loss, as it has not had time to make up the costs it advanced. Lenders also know a mortgage prepayment penalty discourages prepayment.

A prepayment penalty provision must be set out for the lender to collect one. If you are applying for a new loan any prepayment penalty should be disclosed in the truth-in-lending statement. Prepayment simply means paying all or part of a mortgage debt before it is due. This could mean refinancing the mortgage or making substantial payments against the principal. A substantial payment is generally defined as an amount that exceeds 20% of the original principal balance. What do I receive in return for selecting a PPM? The benefit of selecting a PPM is usually reduced fees or a lower mortgage rate. When considering a PPM, you should compare a PPM product to a product that does not contain a PPM.

What if I sell my home within the specified prepayment time period? Some lenders waive the prepayment penalty fee if you sell your home but charge the fee if you refinance your loan. Confirm with your lender to see when a fee would be charged. How can I determine if a prepayment mortgage makes sense for me? Before choosing a prepayment penalty mortgage, you should assess how long you will keep the mortgage before refinancing or making a large payment to understand the probability of incurring a penalty. In addition, you should understand the amount if subject to the penalty and how long it would take to break even if you decide to prepay and incur the penalty. If You Already Have a Loan With a Prepayment Penalty and Want to Get Out of It. Instructions

STEP 1: Read your loan note. This document will tell you the exact terms and length of your prepayment period.

STEP 2: Consider your reason for wanting to get rid of your prepayment penalty. Do you want to refinance to get a lower rate? Are you moving? If you are moving, are you being transferred or is it a voluntary move?