Avoiding a Pre-payment Penalty

Pre-payment penalties can add thousands to payoff your mortgage. The best way to avoid a pre-payment penalty is to not have one in the first place. Lenders will often let you buy out of the penalty or will charge you a higher interest rate to waive the pre-payment penalty.

On the other hand, if you plan to be in the mortgage for quite a while...sometimes you can actually get a lower interest rate by allowing a pre-payment penalty to be attached to the mortgage. A pre-payment penalty guarantees revenue for a lending institution for a fixed period of time (usually 1-3 years) and can make them more flexible as to the interest rate you will have with them.

If there is going to be a prepayment penalty on your loan it is important to know the difference between the different types. A soft penalty will be assessed if you choose to refinance your home within the prepayment term, but will not be charged should you sell your home and move.

There are several different types of prepayment penalties. You have a hard prepayment penalty, a soft prepayment penalty and a hybrid prepayment penalty.

If you are considering refinancing, review your current mortgage's paperwork to see if you will have a prepayment penalty. If you are not sure where to look, take your paperwork to your mortgage professional and ask.
If you do have a prepayment penalty, ask what your options are. They may include waiting for a few months for the prepayment penalty period to end, submitting the loan to the same lender and asking that they waive the prepayment penalty, or rolling the penalty into the loan.

You should always be aware if the loan you are getting into has a prepayment penalty. Unfortunately, there are some unscrupulous lenders out there that will hide the prepayment penalty from you, and you may not find out until after you sign the mortgage documents. You should ALWAYS ask your lender whether or not your loan has a prepayment penalty, and ask to review the documents one day before closing so you have time to read them thoroughly.