This is a penalty that allows a lender to charge you a percentage of your loan balance if you pay your mortgage debt before the term expires. This usually applies to disbursements that occur early in the term of a loan and are not valid after about five years. This mechanism allows the lender to have a steady income from your loan for a certain amount of time.
The picture of a prepayment penalty is often negative, but agreeing to pay for it may mean a lower interest rate for those with good credit. You should talk to your credit representative about this option and make sure that it benefits you. Also, make sure the penalty applies to selling the house or refinancing (or both). Prepayment penalties limit both refinancing and home sales.
Some loans require a prepayment. With bad credit, you will probably be a subprime candidate and you may not be eligible to remove the penalty from your contract. The prepayment penalty helps a lender reduce the risk of bad credit. Over time, and under certain conditions, your lender may allow you to refinance your subprime mortgage and cancel the prepayment penalty.
While subprime borrowers may not have a choice, they may be able to negotiate other aspects of the sanction, such as the percentage, amount, or length of time they are in effect. Keep in mind that long penalty periods can be a red flag in your subprime loan – this is a way for unscrupulous mortgage lenders to keep bad borrowers in lengthy and expensive (and bad) loan agreements.
To make sure you know your advance payment terms, ask your loan representative to explain it orally to you. Make sure you understand everything and everything is in the contract. When you receive your note at the end, do not make the mistake of not reading it! Discipline to read every word, and if you have questions or concerns – or there is something you have not been told in advance – make it known and let it explain.
Be wary of lenders who are not allowed to pass on prepayment penalties to you, and then add the papers to the deal. You may hope that you do not notice it or claim to have forgotten to tell you about it. Do not let them do that to you. In many states, prepayment penalties are already illegal.
Be an informed and intelligent home buyer. Do not know what all the paperwork means: read it every time it is handed to you, and do not sign anything until you understand it completely.