Mortgage Financing - Prepayment Penalties

Prepayment Penalties

Is it a good or bad idea to accept a home mortgage loan that includes a prepayment penalty? Lenders, and the investors who buy loans from lenders in the secondary market, are willing to accept a lower rate in exchange for a prepayment penalty. The obvious benefit of a prepayment penalty to prospective lenders is that it discourages refinancing if interest rates decline in the future.

As a home buyer, how much can prepayment penalties affect you? Prepayment penalties are usually expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest. Usually, the penalty declines or disappears with the passage of time. Often, partial prepayments are allowed up to 20% of the balance in any one year.

A penalty may or may not apply to repayment resulting from a home sale. If you are 100% sure that you won't be selling your home soon then it may be a good idea to get mortgage financing that includes a prepayment penaly, especially if the lower interest rate in trade is well worth it.

It may be the case that you have to settle for a home loan with a prepayment penalty simply because your credit is not up to par. Most prime borrowers avoid prepayment penalties because they can. Loan providers seldom try to force the issue with them. But that also means that in many cases, prime borrowers are not offered a prepayment penalty option.