Often, lenders demand a prepayment penalty if you prepay the mortgage before a certain amount of time, usually five years, to deter borrowers from quickly refinancing their loans, which would drastically cut into the lenders’ profits.
When breaking your mortgage contract early, usually because of a refinance or the sale of your home, you will unfortunately have to pay your lender a penalty called a prepayment penalty. The amount you pay will depend on a variety of factors including the day you signed your original mortgage contract, the term of that contract and your existing mortgage balance, rate type and mortgage rate.
Prepayment is when your mortgage is paid in full before the due date. If you’ve been thinking of refinancing your mortgage, it’s important to see if any prepayment penalties exist on your current mortgage. If you do have a prepayment penalty in your current mortgage, that doesn’t necessarily mean refinancing is the wrong choice for you.
A Prepayment Penalty is a fee that your lender may charge if you make more than the allowed additional payments toward your mortgage, or you pay off your mortgage entirely before the end of your mortgage.
Why do lenders charge prepayment fees? Some loans are designed to last a certain number of years (such as 30-year mortgages or five-year auto loans). If you pay the loan off early, you may have to pay.
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· The prepayment penalty shall be an amount equal to six months advance interest on the amount of the prepayment that, when added to all other partial prepayments during the twelve-month period immediately preceding the date of the full prepayment, exceeds 20% of the original principal amount of this Note.". The language will vary by state.
How to Calculate a Prepayment Penalty. If you are dealing with a situation involving a long-standing, sizable debt, like a mortgage, you may want to know about how a prepayment clause of your lending contract applies to your loan..
2. If I break the mortgage and stay with you, will you forgive a percentage of my penalty or apply unused prepayment privileges, to reduce my penalty? The logic: More lenders are doing this as.
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