Mortgage Prepayment Penalties
It is not only the rates and terms that are important when you approach a lender for a mortgage on a new home. It’s vital to make sure you don’t accept a loan with prepayment penalties. At least, you should be aware of its meanings and consequences for your particular situation. A prepayment penalty is basically a provision of your mortgage contract, stating that if you pay off the loan entirely, you will have to pay a penalty. This penalty may come in different sizes and forms.
In essence, prepayment penalty is a method investors use to protect their investment. These penalties guarantee a minimum rate of return, and make the investment more valuable to the lender. There are a “hard” and “soft” prepayment penalty forms. A “hard pre-payment” means that you will have to pay a penalty in case you pay off the loan for any reason during the specified period, while a “soft pre-payment” implies that the penalty is only enforced if you pay off the loan through a refinance.
Always carefully examine the prepayment rider in your policy before you sign anything. You should be aware of the true nature of the mortgage prepayment penalty not to be financially trapped later on. It will be wise to have a neutral third party such as an escrow officer explain everything concerning the prepayment penalties to you.