What you ought to know (#12)...

What is a" prepayment penalty"?

A prepayment penalty is 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. Prepayment penalties are common on "subprime" mortgages, which are given to people who have blemished credit, a spotty employment record or a lot of debt.

From a lender´s perspective, a prepayment penalty helps the lender recover some, or all, of the significant expenses it incurs in putting together a new loan. If the loan is repaid quickly, such as if you refinance it, 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.

Partial prepayments of up to 20% of the balance usually are allowed in any one year without a penalty. A penalty that applies to a home sale, as well as a refinancing, is a "hard" penalty. If it applies only to a refinancing, it is a "soft" penalty.

Some lenders collect a flat 2% of the outstanding loan balance as a penalty. In other cases, the penalty might start at 3% of the balance, then decline by one percentage point a year. Other lenders charge a penalty equivalent to six months of interest.

How do you know if you have a prepayment penalty? Check the bottom of your Truth-in-Lending Disclosure. At the bottom of the page, the last disclosure should be your prepayment penalty information.

Bottom-line...if you are unsure how a prepayment penalty will affect you with the purchase, refinance, or sale of your home, call Arrowhead Home Loans.