What is a “prepayment penalty”?
A prepayment penalty is a monetary penalty enforced upon a borrower when he or she pays a loan off earlier than was originally agreed. Loaning institutions enforce a prepayment penalty in order to guarantee they make a certain amount of money from loaning money to a borrower. Over the years, this type of penalty has been subject to great debate. As a result, not all loans have this as a requirement. Those who support the prepayment penalty practice argue that if a person takes out a loan, he or she is agreeing to pay a certain amount of interest over a certain amount of time. If the client pays the loan off sooner than originally agreed, there is less interest to pay. In this case, the lending institution stands to lose money on the original. Many lending institutions attach a prepayment penalty to a loan because loan refinancing has become relatively commonplace. If a consumer takes out a loan, pays on it for a period of time, and then refinances at a lower interest rate, he or she sa
A prepayment penalty comes into effect when you pay off the balance of your loan prior to it coming due. For instance, let’s say that you owe $2,500 a month on your mortgage, and you decide to pay $5,000 during one month to get ahead on your payments. Your lender may charge you a fee for the privilege of paying down your mortgage early, since doing so costs the lender interest revenues. Your loan should have stipulations for prepayment penalties, if they exist. When you make your original agreement with the lender, you can specify an abbreviated prepayment penalty period. To qualify for this, you generally have to provide some incentive to the lender. For instance, you may buy few extra points in your mortgage as a show of good faith and as a way to provide the lender with some extra security. If you anticipate being able to chip away at your mortgage faster than expected, ask if you can find a loan with a very short prepayment penalty term.
temptation because it could cost you money in the long run. One of the items that’s commonly missed on mortgage agreements is the prepayment penalty. So many people needing to pay off their mortgage are awakened to reality when they find out that there is a prepayment penalty clause buried within the fine print of their documents. You probably don’t even remember if your loan officer went over it during your loan closing. Sometimes these things are talked about during the closing but the loan officer only mentions them very briefly and vaguely before he rushes you on to other things within the contract that you probably won’t object to as much. A prepayment penalty clause states that if you pay off your mortgage loan before the maturity date then you will be accessed a prepayment penalty which is expressed as a percentage of the outstanding balance. This percentage, depending on your mortgage, could range from 3% to 20%, and it applies to your outstanding balance at the time of the pay
A prepayment penalty is a monetary penalty enforced upon a borrower when he or she pays a loan off earlier than was originally agreed. Loaning institutions enforce a prepayment penalty in order to guarantee they make a certain amount of money from loaning money to a borrower. Over the years, this type of penalty has been subject of great debate. As a result, not all loans have this as a requirement. Those who support the prepayment penalty practice argue that if a person takes out a loan, he or she is agreeing to pay a certain amount of interest over a certain amount of time. If the client pays the loan off sooner than originally agreed, there is less interest to pay. In this case, the lending institution stands to lose money on the original. Many lending institutions attach a prepayment penalty to a loan because loan refinancing has become relatively common. If a consumer takes out a loan, pays on it for a period of time, and then refinances at a lower interest rate, he or she saves m
A prepayment penalty is a penalty to the borrower in the event that they pay their loan off within a given period of time. Not all loans have this feature. As a matter of fact, most loans that Loan Link Financial Services procures do not have prepayment penalties due to the fact that they can be quite limiting. At Loan Link we are big fans of people having flexibility with their money. The rational behind a prepayment penalty is that the investor wants to be guaranteed of making a certain amount of money from the customer whether they are with them for a long period of time or not. Many investors attach prepayment penalties to loans because of the heavy amount of refinancing that has taken place through the 1990’s. Prepayment penalties vary from one lender to another in terms of their impact. Some, which are referred to as soft prepay, actually are waived in the event of a sale and only kick in when there is a refinance. The most common prepay is the following formula: 6 months interes
