When you find a house to purchase and begin to crunch the mortgage numbers, the lender will probably offer you a few loan options - and some may...
When you find a house to purchase and begin to crunch the mortgage numbers, the lender will probably offer you a few loan options - and some may...
View New Home Loans Guide RSS feedFor many first-time homeowners, the excitement of purchasing a home may distract them from examining every detail of their home loan and one detail that many first-time homeowners overlook is the prepayment penalty. Read this article to learn how this penalty can affect the refinancing or selling of your home later on.
When you find a house to purchase and begin to crunch the mortgage numbers, the lender will probably offer you a few loan options - and some may carry prepayment penalties. These loans will probably have lower interest rates that are attractive. This is because the prepayment penalty guarantees the lender a certain level of profit should you choose to sell or refinance. So should you accept such an offer? That depends on the facts of the case.
A prepayment penalty is a fee the lender charges you should you decide to end your contract early. The penalty is a clause included in certain mortgage contracts, not in every one. The fee is usually a percentage of the loan balance. According to Real Estate Professor and publisher Jack Guttentag (www.mtgprofessor.com), the percentage of the penalty usually declines over the life of the loan and often disappears by the fifth year.
A prepayment penalty can save you big bucks in interest payments. Guttentag says loans with penalties can be a quarter point lower than similar mortgages without such penalties. The question you need to ask yourself is: 'Am I going to refinance before this penalty expires?' Or 'Is this going to hit me when I sell in four years?'
High risk borrowers probably would be better off with a prepayment penalty. According to online lender Quicken Loans (www.quickenloans.com), most lenders will only offer loans to risky borrowers if they accept the prepayment penalty clause. This lowers the total risk for the lender.
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