Mortgage lenders make money primarily through interest payments, which means many loans come with a mortgage prepayment penalty. And while not impossible to prepay your mortgage, it’s important to understand prepayment penalties and how they work.
Some lenders charge prepayment penalties for paying out the loan balance in one payment. Penalties will differ depending upon the loan’s length and the corresponding interest charges. Some utilize the remainder of your outstanding loan balance, while others can use sliding payments based on time you’ve spent repaying your mortgage.
Prepayment penalties are meant to keep borrowers from paying off their loans before the end of the loan term. In some cases, they can reduce the benefits of eliminating the debt and avoiding interest. Prepayment can also cause temporary damage to your credit score.
However, not every loan includes a prepayment penalty clause. Regardless of whether you anticipate refinancing or paying your mortgage early, it’s important to understand the terms and conditions from your lender.
There are a few ways lenders calculate a prepayment penalty. Often, it can be a small percentage of your remaining balance. This means you’ll pay a higher penalty the sooner you pay off the loan.
As mentioned earlier, some lenders will charge a certain number of months’ worth of interest, while others use a sliding scale based on the length of the mortgage. It’s also possible for a prepayment penalty to be a fixed amount, though this is more common in personal loans compared to mortgages.
How does the math actually work for prepayment penalties? For a percentage of the remaining balance, consider a mortgage loan of $200,000. If the penalty is equal to 2%, and you’ve only paid $20,000 of the loan amount (10%), your penalty would come to $3600:
200,000 - 20,000 = 180,000
180,000 x 2% = 3,600
There are definite advantages to paying off a mortgage early. However, it’s crucial to understand the terms of your loan and whether a prepayment penalty fee is something you need to consider.
Welcome to my real estate website, your number one source in Real Estate. As an agent who's an expert in this local area, I bring a wealth of knowledge and expertise about buying and selling real estate here. It's not the same everywhere, so you need someone you can trust for up-to-date information. I am eager to serve you. Here are some of the things I can do for you:
Find Your Next Home
You need someone who knows this area inside and out! I can work with you to find the right home at the right price for you, including all the neighborhood amenities that matter - not to mention the essential criteria you have for your ideal home
Sell a Home
When it's time to move, you need someone who will advertise your home, show to prospective buyers, negotiate the purchase contract, arrange financing, oversee the inspections, handle all necessary paperwork and supervise the closing. I can take care of everything you need, from start to close.
Consult on Home Selling Tactics
Oftentimes buyers don't visualize living in your home the way you do. I can make your home attractive to its ideal audience - which can help you get top dollar. Things like staging the home, making repairs or minor improvements, or even simply painting the walls can be the difference between a home resting on the market and one that's sold fast.
Feel free to contact me today. I love what I do!!
