What Is A Prepayment Penalty?
Posted by ecreal on November 14th, 2009
Maybe you have heard the term ‘prepayment penalty’ used before but aren’t quite sure what it means. A prepayment penalty is defined as extra fees that may be due if you pay off your loan early by refinancing the loan or by selling the home. If you have an FHA loan, odds are you won’t ever have to worry about prepayment penalties, but there are some things you should be aware of.
Here are some facts on prepayment penalties:
• Refinancing or selling a home is technically prepayment.
• Prepayment penalties are written into mortgage contracts to compensate the lender for prepayment risk.
• The amount due for a prepayment penalty is usually expressed as a percent of the outstanding balance at the time of the prepayment or a specified number of months interest.
• These penalties usually only apply if the mortgage is prepaid within a certain time period.
• A prepayment penalty that applies to both the sale of a home and a refinancing transaction is called a “hard” penalty.
• A prepayment penalty that applies to only refinancing is called a “soft” penalty.
• FHA home loans are forbidden by law to contain prepayment penalties (except on certain specific circumstances, like tax-exempt bond financing).
• Subprime loans commonly have prepayment penalties.
• You should review your mortgage closing documents for the possibility of a prepayment penalty and the amount.
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Photo by: arenamontanus // CC BY 2.0
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