Understanding Prepayment Penalties on Home Loans

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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...

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