Mortgage Prepayment Penalty

What is a Mortgage Prepayment Penalty?

The mortgage prepayment penalty is a clause in your loan contract that requires you to pay a fee for terminating your loan early. This means if you sell your home or refinance your mortgage before the penalty expires, you will have to pay the fee. Mortgage prepayment penalties can be quite hefty; you may be required to pay as much as six month’s worth of mortgage interest on 85% of your original loan balance.

Should You Accept a Mortgage with a Prepayment Penalty?

In a word, “No,” especially if you have a good credit rating. If you have poor credit you may need to negotiate with your lender to exclude the mortgage prepayment penalty; however, there is no reason for borrowers with good credit ratings to accept a mortgage that includes a prepayment penalty.

Predatory mortgage lenders often use excessive mortgage prepayment penalties in their loan contracts, and these fees are very common with bad credit mortgage lenders. If you will be using your mortgage to rebuild credit, you will need to refinance the loan after two years of making your mortgage payments on-time. If you accept a mortgage with a prepayment penalty, refinancing once your credit improves could be difficult with this fee.

Comparison shopping from a variety of mortgage companies and brokers could help you qualify for a loan without a mortgage prepayment penalty. Mortgage Brokers can be especially helpful for homeowners with poor credit because of their extensive contacts in the mortgage industry. If you decide to use a mortgage broker to find a mortgage without a prepayment penalty, you will need to watch your broker like a hawk to avoid overpaying for your mortgage.

Mortgage brokers routinely add Yield Spread Premium to their loans in order to boost their profits at your expense. Yield Spread Premium is the retail markup of your mortgage interest rate by the Mortgage Company or broker. If you agree to pay Yield Spread Premium with your mortgage interest rate, you’ll pay thousands of dollars in unnecessary finance charges every year.

You can learn more about your mortgage options, including costly mistakes to avoid like accepting a mortgage with a prepayment penalty or paying Yield Spread Premium with our free, six-part video tutorial.