Mortgage lenders seem to prefer certainty over chaos. Many lenders instill this concept into their mortgages. They do this by inserting penalty clauses in regards to prepayment.
Whenever mortgage lenders evaluate loan applications, they perform various points of analysis for determining profit and risk scenarios. A lot of lenders base their analysis on a specific period of when they can be certain you’ll by paying the loan back. To ensure this takes place, they put in prepayment penalties to dissuade your from paying it off early, and messing up their calculations. You’re still able to refinance, but these penalties will make it a very dubious last decision.
All prepayment penalties are is a simple arbitrary provision requiring you to pay fees for paying off your home loan before a specific point of time. This can be a set fee, multiple payments, or the equivalent of paying points. They have a whole spectrum of penalties to use, because these laws are governed by the state, not federal government. Because the states very seldom pass the exact same laws, then each state has its own unique set of rules for saying what the lenders can do and what they can’t. You’ll need to check on the state laws where you are or talk with a broker to see where you stand.
Some of these prepayment penalties can be quite staggering. No matter what formula they use for determining them, expect a heavy penalty that is pushed to the maximum amount allowed by law. Lenders want you to stick with the agreements of their original loan. If you go to refinance, they’ll want a pound of flesh. It’s true whether it’s by choice, or if you suffer some unforeseen emergency that causes you to sell, like divorce, job loss, or other life events.
Whenever it’s possible, you need to avoid any mortgage that has prepayment clauses within it. They’re just not worth all the aggravation. If you absolutely MUST take penalty clauses, then try to shop around for loans that have the shortest penalty durations. many lenders try to get the prepayment penalty to be applied for the full term of the loan, but then there are some that only require a year or so. It’s my strong recommendation that you steer clear of all loans containing prepayment penalties that last for the life of your loan. You’ll end up regretting that.
Luckily, the industry happens to be a very competitive one. So in order to compete to get your business, many lenders have already moved away from adding these prepayment penalty clauses. If they haven’t totally taken them out, some have at least taken the sting out of them. But it’s a good idea to stay away from these killers as much as possible.