Pre payment penalties have been getting a bad rap lately in the media. I often hear or read stories about home owners that said they were unaware that their home loans had prepayment penalties until it was too late. Their loan officer slipped it in the closing documents or they were at the closing table and had to sign because their stuff was on a moving truck and they couldn’t delay any longer. Depending on who the lender is, a pre payment penalty can range from 6 months of interest to up to 5% of the unpaid loan balance. Typically they have been associated with sub prime and hard money loans. Now many A paper loans are offering prepayment penalties. If you choose a prepayment penalty on an A paper loan you can receive a lower rate of interest. Typically it will range from a .125%-.25% interest rate reduction. A lender will give you this perk because when they sell their mortgages on the secondary market, they can get more for them and they are able to pass this on to the consumer. The secondary market likes longer term notes. Pre Payment penalties don’t have to be trouble if you know how to leverage them. Either you have your loan or your loan has you. If you understand how they work and can effect you, a pre payment penalty can be leveraged for a financial benefit.
There should never be an instance that a borrower winds up with a prepayment penatly unknowingly. It is something that should be fully exposed by you loan officer or lender. There is a separate disclosure that you will need to sign in your closing papers to disclose that a pre payment penalty is part of your mortgage agreement. If you are not sure ask the title agent. It is there job to explain everything that you are signing. They will be able to point it out to you if in fact there is one.
Remember that until a mortgage is recorded you can back out. If you are unsure or uncomfortable with the terms of you loan don’t do it. Never make any financial decision that you are uncomfortable with.
Go to GetPrequalified.com. for additional articles on mortgages, real estate and finance.
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