Understand prepayment penalties, including why they're charged, how they vary, and what borrowers should consider to avoid surprises.
A prepayment penalty is a fee that lenders might charge borrowers for paying off their mortgage loan early, either through refinancing, selling the home, or making large payments towards the loan balance ahead of schedule. This penalty is intended to compensate the lender for the interest income they lose when a loan is paid off before the end of its term. The specifics of a prepayment penalty, such as the amount and the circumstances under which it applies, are typically outlined in the loan agreement.
Understanding prepayment penalties is crucial for borrowers to avoid unexpected costs and make informed decisions when choosing a loan or considering paying off a loan ahead of schedule.
You can check the loan agreement documents you received at closing or contact your lender directly. Your loan documentation should disclose the presence and details of a prepayment penalty.
While not common, some lenders may be willing to waive or reduce a prepayment penalty, especially in refinancing with the same lender. Negotiation is more likely to be successful before signing the loan agreement.
The amount and type of extra payment can affect the application of prepayment penalties. Some lenders allow borrowers to pay off a certain percentage of the loan balance each year without triggering a penalty. Specific terms should be detailed in your loan agreement.
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