A prepayment penalty is a fee some lenders require you to pay if you refinance the mortgage or sell your home before the loan expires. These penalties are intended to discourage refinancing.
Prepayment penalties are typically six months worth of interest based on 85% of the original loan balance. This can be a very stiff penalty; if you can avoid a prepayment penalty in your mortgage contract you will be much better off.
Most of the contract you sign with a lender is subject to negotiation. Competition for your loan is fierce, even bad credit lenders have to make concessions to get business. Negotiate with the lenders you contact to have this prepayment penalty removed.
If your lender refuses to drop the prepayment penalty and you have cash on hand, you might try offering to pay points on the loan. Points are a fee you pay the lender upfront in exchange for a better interest rate or more favorable terms. By paying this fee upfront the lender might be persuaded to drop the prepayment penalty.
Do not settle for a mortgage offer that includes a prepayment penalty. The mortgage industry is extremely competitive; if you have good credit you can find a lender with competitive loan offers that do not include prepayment penalties.
If you have poor credit you may be stuck with the prepayment penalty. You will need to shop from a variety of lenders that specialize in bad credit mortgages to find the best offer. Look for prepayment penalties with the shortest duration of time and lowest amount. Do not accept a mortgage loan offer that includes a prepayment penalty for the entire duration of the loan. Even with bad credit you can find lenders that do not carry penalties of that duration.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
