Payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.
If you plan to stay in your home for more than 3 years, for example, you might be able to get a slightly lower interest rate if you agree to take a 3 year pre-payment penalty. As long as you don't move or refinance for 3 years, you will save money with the lower interest rate. If you have to move within the first 3 years due to an unforeseen emergency, you will have to pay the pre-pay penalty. It will be based on the amount of time left in the penalty period.
A Hard prepayment penalty means that you will incur a penalty for paying off your mortgage early regardless of whether you are selling your home or refinancing.
In most cases, you can take a minimal hit to your rate for a shorter or no prepayment penalty.
A Soft prepayment penalty will allow you to sell your home without incurring a penalty for paying off your mortgage early. If you were to refinance within the prepayment period with a soft prepayment, you would incur a prepayment penalty.
A pre payment penalty is usually six months of your mortgage payment
Some states do not allow Pre-Payment Penalties, or have modified penalties. The only exemption to this, would be from a Federally Chartered Bank.
Keep in mind that a prepayment penalty allows lenders to fund loans which might be unprofitable without these guarantees. Ideally, a loan not intended to refinance within the prepayment period allow a lower rate for borrowers and less risk to the investor, a win-win scenario.
You should check if your loan has a prepayment penalty by reviewing the federal truth-in-lending disclosure you will receive from the lender when your loan application is submitted.
When purchasing a home you intend to live in for a long period of time always take a prepayment penalty. If you keep the loan in place for 10 years or better you will save thousands over the life of the loan.
Usually the term on a prepayment term is anywhere from 6 months to 5 years.
Some states limit the application of pre-payment penalties by local or regional lenders, however national lenders will often be able to offer a loan with a prepayment penalty even in these states, and often a lower rate and or payment as a result.
