Prepayment Penalty Pitfalls

Many homeowners don’t know what a mortgage Prepayment Penalty is until it’s too late. What is a prepayment penalty and is it something that you can avoid? Here’s what you need to know to make sure a prepayment penalty doesn’t sour the sweet refinance rates you’ve just locked down.

Prepayment Penalty Definiton

A mortgage prepayment penalty, also called a prepay, is a stipulation in your contract regulating when and how you’re allowed to pay off the loan. Mortgage lenders generally allow you to pay up to 20% of your loan balance every year.

You’re probably asking “Why on Earth would anyone want to pay off more than 20% of their loan balance in a year?!” Selling your home or getting lower refinance rates are common reasons for paying off the mortgage balance before the end of the term length.

There are two kinds of prepayment penalties that you need to be aware of. The types are hard and soft mortgage prepayment penalties. The soft prepayment penalty allows you to sell at any time without incurring a penalty; however, if you refinance your home loan you’ll be hit paying the fee.

The hard mortgage prepayment penalty socks it to you no matter what you do. It doesn’t matter if you sell, refinance or make a large equity payment greater than 20 percent, you’re going to get stuck paying the lender to get out from under your home loan.

How Much Will It Cost Me?

A typical prepayment penalty is 80% of six months’ worth of interest-only payments. Prepayment penalties vary by mortgage lender. The six-month’s interest is based on the interest only portion of your payment.

Suppose your mortgage was $350,000 at 5.5%. The interest-only payment is $1604 per month. Take 80% of six months of this payment and the prepayment penalty in this case is $7,699. This is a shocking expense to say the least, especially if you’re not expecting it.

Typical Prepayment Penalty Example:

  • $350,000 Mortgage
  • 5.5% Mortgage Rate
  • Interest Only Payment: $1,604
  • Six Months of Payments: $9,624
  • 80% Prepayment Penalty Amount: $7,699

How to Avoid Mortgage Prepayment Penalties

While accepting a prepayment penalty in your loan contract will typically get you lower refinance rates, it can bite you down the road when you decide to sell or refinance. Always check the fine print and ask your broker to make sure the contract doesn’t include the penalty. This is something that can be negotiated away when shopping for the lowest refinance rates.

If you’re considering an FHA mortgage this isn’t something you need to worry about as FHA home loans do not include prepayment penalties.

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You can learn more about getting the best deal on your next home loan without paying unnecessary points or fees by checking out my free Underground Mortgage Videos.

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Here’s a quick sample to get you started on the path to mortgage bliss with the lowest refinance rates without junk fees…

Minimizing Mortgage Refinancing Risks

Mortgage refinancing offers many advantages and potential savings; however, there are a number of risks and expenses that you should keep in mind. If you are refinancing because your existing mortgage has an adjustable interest rate you can minimize your risks by choosing a mortgage with a fixed interest rate; however, anytime you take out a new mortgage you run the risk of overpaying for the new loan. Here are several tips to help you protect yourself from lender abuses when refinancing your mortgage.

The main objective for many homeowners when refinancing is to obtain a loan with a lower mortgage rate and better terms. A lower monthly payment isn’t the objective for every homeowner; some people refinance their mortgages with a higher monthly payment in order to pay down their mortgages more quickly. Regardless of your objective for the new mortgage there are steps you can take to ensure your mortgage broker and lender are not taking advantage of you when refinancing.

refinance mortgage bad credit Minimizing Mortgage Refinancing RisksOne of the risks you encounter when refinancing your mortgage is the markup your broker adds to your interest rate to get a commission from the lender. This markup of your mortgage interest rate is called Yield Spread Premium and according to the Department of Housing and Urban Development is responsible for homeowners in the United States overpaying billions of dollars each year.

Yield Spread Premium can be avoided when refinancing your mortgage. You’ll be required to pay an origination fee for your mortgage broker’s services; a reasonable amount to pay for refinancing your mortgage is one percent of the loan amount. Because you’re paying this fee any commission from the lender is not only completely unnecessary but is taking advantage of you. Talk to potential mortgage brokers before entering an agreement and explain that you understand how Yield Spread Premium works and will not tolerate this unnecessary markup with refinancing.

There are other risks from hidden fees and penalties when refinancing your mortgage. Make sure your existing mortgage does not include a prepayment penalty; lenders frequently include hefty penalties to discourage their borrowers from refinancing the loan. These penalties are unnecessary and can be as high as six months of interest on your original loan balance. If you’re unsure whether or not your existing mortgage includes a prepayment penalty contact your lender prior to applying for a new loan.

You can learn more about minimizing your risks when refinancing and other costly pitfalls to avoid with a free six-part video tutorial. The videos walk you through the entire process of refinancing without paying too much and are broken up into the following sections:

  • Part One: Mortgage Refinancing Introduction
  • Part Two: Refinancing in the Mortgage Marketplace
  • Part Three: How Your Credit Affects Your Mortgage
  • Part Four: Dirty Little Mortgage Secrets You Need to Know
  • Part Five: Refinancing Your Mortgage on the Internet
  • Part Six: Refinancing Your Mortgage Step-by-Step
  • These videos are yours free with no cost or obligation. Get your copy today; it’s fast, easy and free. Click Here to Register Now.

    Refinancing Headaches

    If you’re in the process of refinancing your home mortgage there are a number of expensive pitfalls you’re likely to encounter along the way. Doing your homework before refinancing will not only help you avoid refinancing headaches but save you thousands of dollars in the process. Here are several tips to help you avoid common mortgage refinancing headaches.

    The biggest headache you’ll need to avoid when refinancing your mortgage is overpaying. Most homeowners never know that mortgage brokers mark up the interest rate wholesale lenders approved them to get a commission. Wholesale mortgage lenders reward brokers for closing loans with above market interest rates. The difference between the interest rate you were approved and the mortgage rate your broker closes with is called Yield Spread Premium. refinancing headaches Refinancing Headaches

    Here’s an example to illustrate Yield Spread Premium in a typical refinancing transaction. Suppose you’re refinancing your home with a $250,000 thirty year fixed mortgage. Your mortgage broker quotes you an interest rate of 6.75% and charges you one point for the origination. Remember that one point is always one percent of your loan amount due at closing. While one point is a reasonable fee to pay for loan origination, what the broker isn’t telling you is that the wholesale lender approved you for a 6.0% mortgage rate. Your mortgage broker marked the interest rate up to 6.75%, without telling you of course, because the lender pays a bonus of one percent of your loan amount for every .25% you agree to overpay.

    In this example your mortgage broker pockets the $2,500 you pay for loan origination AND $7,500 from the lender for overcharging you. For a couple hours work your mortgage broker walks away with $10,000 and you get stuck paying an above market mortgage rate for the entire time you keep this loan. There is good news for homeowners who do their homework can avoid this refinancing headache; you can avoid paying the unnecessary markup know as Yield Spread Premium by learning to recognize the markup and negotiating with a mortgage broker to pay an upfront fee when refinancing.

    Watch out for Prepayment Penalties

    Another source of refinancing headaches for many homeowners is the dreaded prepayment penalty. Before setting out to refinance your existing mortgage make sure your existing loan does not include a penalty for early repayment. Your loan originator might try to slip this penalty past you to get an incentive from the lender; however, unless you have poor credit and no other option, there is no reason whatsoever to accept a mortgage when refinancing that includes a prepayment penalty. Shrewd negotiating and cutthroat competition in the industry will ensure this is one refinancing headache you don’t have to face; don’t be afraid to remind your broker just how competitive it is out there.

    Tell Your Mortgage Broker to Take Out the Trash

    The final source of refinancing headaches we’ll discuss today are garbage fee. Chances are more likely than not, your Good Faith Estimate is littered with junk fees you don’t have to pay. If you find anything on your Good Faith Estimate that resembles an application fee, lock fee, broker courier fee, or computerized loan origination fee, these are garbage fees you should not be paying. Again, reminding your loan originator how much competition there is for your loan and telling them to take the trash out of your Good Faith Estimate will help you avoid many common refinancing headaches. You can learn more about your refinancing options and other headaches to avoid with my free refinancing toolkit. You can access the video toolkit by clicking the DVD image at the top of this page.

    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.