How to Avoid Mortgage Prepayment Penalties

New homeowners are often surprised when they learn that paying off their mortgage early can result in prepayment penalties. Knowing what a mortgage prepayment penalty is and how to avoid it will save you a lot of heartache and valuable money. First of all, a mortgage prepayment penalty is "a provision of your contract with the lender that states that in the event you pay off the loan entirely, you will pay a penalty. Penalties are usually expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest" as defined by www.mtgprpfessor.com. Penalties exist if you pay more than 20% of the principal balance within a given year, or if you pay off the entire balance in less than the time written in the contract. This is a way lenders pin consumers down to stay in debt, because it is how they make money. The interest payments homeowners make are what fatten the pockets of the mortgage company, thus your paying off earlier would eliminate their ability to make money. The penalty is sort of a consolation for the loss in interest you would have had to pay over the years. Now, here are 10 tips for avoiding prepayment penalties:

Make a Hefty Down Payment on Your Mortgage: Borrowers often get loans with prepayment penalty clauses because they did not make a down payment or the amount made is not significantly large compared to the principal borrowing. To avoid prepayment penalties on your loans, save up enough money and make at least a 20% down payment. You will have better loan options and may not be subjected to prepayment penalties.

Have Good Credit: Before you buy a house, you want to spend ample time checking for ways to make your credit scores good. Having a good credit score makes you more competitive in the market, as lenders would like to lend your money. With good credit and enough money for down payment, you are at a great advantage to get a prime loan which comes with great interest rates.

Take a Slightly Higher Interest Mortgage: You might think I'm nuts for saying this, but taking a mortgage at the rate of 6% versus 5.75% could be the difference between prepayment penalties and no other obligations. For instance, if you feel that interest rates may decline in the near future, then getting the 6% rate will be better because you can refinance as soon as you can get a better deal. With prepayment penalties, you are locked into a number of years before you can do anything.

Read the Loan Terms and Conditions Carefully: Some people get into prepayment penalties without knowing it. This is because the tiny prints and the legal terminology used in that lengthy form can be hard for even the most educated person to fathom. Have the mortgage brokers or lenders read it to you and insist they explain in layman terms what each means.

Know Your Numbers: If you do find yourself in a mortgage prepayment penalty, find out for how long the penalty is and what percentage you must pay. Most loans of this kind come with 3-5 or maybe 7 years term. If you pay off or refinance before that time, then you might be subjected to pay a fee totaling a certain percentage of the principal balance.

Ask Questions: Don't assume that your loan is fixed with no penalty. Be persistence and ask the lender in various ways to be certain that there will be no penalties for paying off our loan early, for making more than the minimum payment. Ask, and you shall find answers.

Wait it Out: If you have already gotten a loan with prepayment penalties, you might want to wait it out. Depending on the number of years you must wait to refinance or pay off, you might find it economically wise to wait for the penalty period to pass before you make your move.

Negotiate with Mortgage Lenders: In time of economic hardship, you might make a deal with your lender to eliminate your penalties altogether. If you are trying to refinance before the time in your contract, let your lender know that things are hard and you want to have the mortgage modified. Let them know that you had always made your payments on time (you should always do so if possible) but cannot possible continue with the way the economy is doing. You might get them to eliminate the penalty clause and refinance you for a lower rate. Try, you never know what would happen if you don't try!

Establishing a Longer Relationship with the Lender: If you are facing prepayment because you are selling your house earlier than the time allowed, you might be able to avoid prepayment penalties if you and the buyer of your house can agree on his or her financing through the same lender. In other words, you are keeping that customer for the lender and so the lender will still be able to make his profit off the new tenant and might waive the penalty for you.

Refinance with the Same Company: Instead of trying to refinance with a different bank, try calling your mortgage company and telling them that you need them to consider your loan for modification. Insist that you cannot wait for the given time to refinance, and remind them that they will still make their profit off you, maybe slightly lower rate. But if you have been a good customer, they will most likely want to keep your business.

Source:

http://www.mtgprofessor.com/a%20-%20options/prepayment_penalty.htm