A pre payment penalty requires a borrower to pay a fee if the borrower pays all or part of a mortgage loan before it is due.

Many loan programs have the option of "buying out" the prepayment penalty for a set fee at the beginning of the loan. This may be useful if you are unsure how long you will be in your house and don't want to worry about paying a large penalty if you pay off your loan early.

There are two types of prepayment penalties, hard and soft. With a soft prepayment you will not be penalized if you sell your home. A hard prepayment penalty is charged any time the mortgage is paid off early - regardless of if you sell or refinance.

A pre-payment penalty usually lasts for the first 2 or 3 years of your loan. Different states have their own maximum guidelines as to how much of a penalty can be charged or for how long a prepayment penalty can be charged. Check with your WI mortgage professional to see if your state has any restrictions regarding prepayment penalties. Federally chartered banks and lending institutions don't always abide by the state laws regarding pre-payment penalties. Therefore, consider your goals and future plans when obtaining mortgage financing when a pre-payment penalty exists. You may also want to ask for the differences in rate and payment with and without a prepayment penalty applied to your loan, if there is any difference at all.

The prepayment penalty is prepaid interest fee you paid to the lender. Thus, this amount can be used for the borrower's income deduction.

If you know that you will be in a home for more than a year, and the prepayment penalty is only good for one year, it may be worth taking the prepayment penalty. Chances are you will get a lower rate, and that lower rate could keep your payments down for several years to come.

One thing to keep in mind is this - if you are applying for an adjustable rate loan, ask your mortgage professional if the prepayment penalty is longer than the initial fixed rate period. You don't want a 3 year prepayment penalty on a loan that has a rate that will adjust in 2 years.

 

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