Prepayment Penalty
A prepayment penalty is penalty or charge to the borrower if the loan is paid off early.
A prepayment penalty can be anywhere from 1 to 5 years but normally it is 2 years.
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That means if you pay off your loan before 2 years are up, you owe the lender.
Prepayment Penalty Defined
The prepayment penalty is a percentage of the loan amount or it can be 6 months of interest. For example, you buy a home and get a loan with a 2 year prepayment penalty.
You decide to refinance your home 18 months after you bought it.
Since you have not had the loan the full 2 years, you owe 6 months interest according to your loan documents. The interest payment is $1,500.
That means you owe $9,000 in addition to the loan balance.
Your payoff for your new refinance will now include an additional $9,000 added to it for an early payoff charge.
Many people do not know they have a prepayment penalty even though during the closing there will be a document you sign with the terms of the prepayment penalty on it.
It is also disclosed on the Truth in Lending in the initial application.
Author: Rob K. Blake
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I have a friend who bought a home last year. A “friend” of his brokered his mortgage and told him that as standard procedure, he would have a pre-payment penalty. His “friend” also told him that it would not affect him because “only if you win the lottery or come into a bunch of money, then the penalty would affect you”
Luckilly, I remembered what you said on your radio show a few years ago that a borrower with good or excellent credit should NEVER have to sign a mortgage with PPP. I relayed that info to him before he signed. I don’t believe that mortgage broker is his friend anymore!