Let’s face the facts here. While mortgage lenders might seem to be very helpful (and they are sometimes!), remember that they are in the business of making money. This means that you need to pay for the help, that is, the money they offer you.
In order to calculate their profit and loss risk, mortgage lenders include prepayment penalties in their terms and conditions of the loan. They need to be sure that you will keep on making payments for at least a specific period.
While you can refinance or pay back all at once, these prepayment penalties would cause you to question your decision to do so.
Now, let us understand what prepayment penalties mean. They are arbitrary provisions, which the lender puts up. As per these penalties, the lender will ask you to pay some fees in the case of you paying off your home prior to some specific point in time.
These penalties can be anything from some point equivalents, a specific predefined fee to some specific number of instalments or payments. The state government deals with setting the law regarding these penalties. As a result, you will find that the penalties are different in different states.
Therefore, in order to find out what you are in for, you will have to speak to your lender or check with the state laws.
While they may be different for different states, they usually are staggering, as a general rule. You can expect this penalty to be the maximum that your state might allow, not considering the method or way used to set it.
The bottom line or the message that these penalties convey is that your lender does not want you to back out of your loan obligations. If you want to refinance, you will not be allowed to do so, unless of course you want to part with a piece of your flesh. That is even if there is some emergency, lost job, divorce or any of the million unfortunate things of life.
As far as possible, it is best to avoid mortgages that have such prepayment penalties included in the conditions. You should not put yourself through the mess of it all. If you do not happen to find any without any prepayment penalties, then look for one that has shortest of such penalty durations.
Some might ask for the penalty duration to extend for the entire loan period, while others might want it for a few years only. My advice would be to avoid at all costs loans that have penalties for the entire loan term. You will thank me later for doing it.
The only good news here is that the competition in this industry suggests that there are many options for you. Chances are that you will find one that offers a shorter duration and terms that suit you.
