QandAs: Loans

What is a Prepayment Penalty?

Answer:
When applying for a new home loan, it is important

for borrowers to shop around and compare different loan programs. Home loans include varying terms and conditions. A common condition included on many mortgage loans is a prepayment penalty. A prepayment penalty is a charge paid by the borrower to the mortgage lender.

This penalty is only imposed if the borrower pays off the home loan early. Not surprisingly, prepayment penalties do not benefit the borrower. Rather, this fee helps the home loan lender recover some of their investment.

In an effort to obtain a lower interest rate or better mortgage deal, homeowners can refinance their loan and pick a new lender. In turn, their old lender loses out on thousands of dollars in interest payments. A few mortgage lenders use a prepayment penalty as a way to deter refinances.

Fortunately, prepayment penalties are not a permanent home loan condition. The average prepayment penalty expires within three to five years, in which borrowers can sell or refinance their home without penalty. Some home loan lenders are willing to negotiate the prepayment penalty. For example, lenders might withdraw the penalty if the borrower agrees to a higher mortgage payment or interest rate.


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