Housing...Inside and Out

April 24, 1998
Prepayment Penalties

When the interest rates drop, many homeowners refinance their home mortgages. There is a catch though. You will probably have to fork over most of the same fees and payments as you did when you got your present loan.

There may also be one additional cost. Your loan contract may have a prepayment penalty clause.

Prepayment penalties are generally assessed against borrowers who pay off their mortgages early. The amount assessed is usually 1 to 5 percent depending on the age of the mortgage, the contract language and other variables. For example, a 3 percent penalty on a $53,000 balance would be $1,590.

This of course is not the only charge but it may be an avoidable charge on the new mortgage if you refinance. Prepayment penalties are usually negotiable when you refinance, sell or take out a new mortgage.

Your chances of modifying the clause are probably poor if you are refinancing at a different at a different institution than where your present mortgage is. Also if you happen to be a large depositor or do some type of commercial business with the institution, your lender may not want to lose those lucrative accounts to another institution.

The prepayment penalties can be asses when a home is sold as well as when you are refinancing. You may gain a little leverage with the lender if you persuade the new buyer to secure financing through the same institution. You might also offer the buyer a better deal if he or she will borrow from your lender.

As the seller of a home, you should be aware of having both the possibilities of a prepayment penalty and a "due-on-sale" clause enforced. A "due-on-sale" clause specifies that the lender is entitled to full payment of the mortgage if the house is sold.

This limits opportunities to sell the house to prospects that wish to assume an existing mortgage. By being forced to pay off the mortgage with a "due-on-sale" clause, you can automatically trigger the prepayment penalty.

If you decide to refinance or sell your home, you will have to worry about such charges as application fees, credit reports and interest points. Any foresight that you might have had when you got the loan will keep you from paying out the additional sums necessary for prepayment penalties and/or "due-on-sale" clauses.

For more information link to Refinancing Your Home


Written by Dr. Francis Graham (Retired)

A black line that separates the body text from footer information