Understanding Prepayment Penalties On Home Loans

Understanding Prepayment Penalties on​ Home Loans
Mortgage lenders prefer certainty to​ chaos .​
Some lenders take this concept to​ its logical conclusion in​ mortgages by inserting prepayment penalty clauses .​
Understanding Prepayment Penalties on​ Home Loans
When a​ mortgage lender evaluates a​ loan application,​ it​ performs a​ number of​ analyses to​ determine risk and profit scenarios .​
For many lenders,​ the​ analysis is​ based upon a​ certain period where they are absolutely sure you​ will be paying back the​ loan .​
To make sure this happens,​ they put prepayment penalties into the​ loan documents .​
While you​ can still refinance,​ the​ penalties usually make it​ a​ dubious financial decision .​
Prepayment penalties are simply arbitrary provisions that require you​ to​ pay a​ fee if​ you​ pay off a​ home loan before a​ certain point in​ time .​
The penalties can be the​ equivalent of​ points,​ a​ number of​ payments or​ a​ set fee .​
There are a​ wide variety of​ penalties because the​ law governing them is​ set by the​ states,​ not the​ federal government .​
Since states rarely pass the​ same law,​ each has its own set of​ rules on​ what lenders can and cannot due .​
You will need to​ check the​ laws of​ your state or​ speak with a​ mortgage broker to​ figure out where you​ stand .​
Prepayment penalties can be staggering .​
Regardless of​ the​ formula used to​ determine them,​ you​ can expect a​ penalty equivalent to​ the​ maximum allowed under the​ laws of​ your state .​
The lender wants you​ to​ continue to​ meet the​ obligations of​ the​ original loan .​
If you​ try to​ refinance,​ they will want their piece of​ flesh .​
This is​ true even if​ you​ must sell the​ property because of​ an​ emergency,​ divorce,​ lost job or​ other unfortunate things that can occur in​ life .​
Whenever possible,​ you​ should avoid mortgages that have prepayment penalty clauses included in​ them .​
They simply are not worth the​ aggravation .​
If you​ must accept penalty clauses,​ try to​ shop for a​ loan that has the​ shortest penalty duration .​
Some lenders will want the​ prepayment penalty to​ apply for the​ full length of​ the​ loan while others may require only a​ year or​ two .​
It is​ strongly advised that you​ avoid any loan that contains a​ prepayment penalty for the​ life of​ the​ loan .​
You will regret agreeing to​ such a​ loan in​ the​ long term .​
Fortunately,​ the​ home loan industry is​ a​ competitive one .​
To compete for your business,​ most mortgage lenders have moved away from prepayment penalty clauses or​ at​ least limited their bite .​
Still,​ make absolutely sure you​ avoid these brutes if​ at​ all possible.

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