Prepayment penalties

You typically have the option of choosing a prepayment penalty. You will normally have better interest rates if you choose to have a prepayment penalty. However, choose carefully as you never know when you will have to or just want to refinance or sell your home. Prepayment penalties can be hefty and can be avoided.

A prepayment penalty is generally 6 months interest.

There are both "soft" and "hard" prepayment penalties. The "soft" prepay allows you to sell your home and not pay the penalty. The "hard" penalty is enforced anytime more then 20% of the balance is prepaid in a year in the first 5 years. Sometimes the length of time is less.

Always ask if the rate you are quoted has a prepayment penalty. Your mortgage professional should disclose this when you are quoted a rate. At the closing table is no time to learn about a prepayment penalty.

If you are planning on staying in your home for three years or more, a prepayment penalty will help you obtain a lower rate. By agreeing to keep the mortgage for the term of the prepayment penalty, the lender will provide you with a lower rate.

If you are getting an 80/20 option to purchase your home, you may want to just get a pre-payment penalty on the first loan. This will allow you to refinance the second should you need cash in the future.

There are also "Hybrid" prepayment penalties which typically mixes 1 year "Hard" prepayment penalty and 2 years of a "soft" prepayment penalty.

One of the only loan programs which allows prepayment penalties are Pay Option Arm programs.

Prepayment penalties are often tax deductible should you decide that you need to refinance or sell your property during your commmitment period. See your trusted tax advisor for more information on how to qualify for the write-off.

Be careful when financing 100% of the value of your home AND picking up a PPP in the process...If you need money in the near future, it won't be in your home...However, if you do 100% financing, you shouldn't be thinking about refinancing for a few years anyway, to build equity and a having a PPP just offers you a lower rate, so there is good and bad in regard to them, each situation dictates it's necessity...

If you are not going to be in your home very long or want the option of refinancing within your penalty period you should not get a loan with a prepayment penalty.

» DISCLAIMER: The information contained in this article on 'Prepayment penalties' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.