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Prepayment penalties are those charges which a lender imposes if
you
wish to pay off your loan early. Typically home mortgages are written
for 15
or 30 year periods of time. While you may not hold the mortgage for
the full
term, it is likely that you will probably stay in the property longer
than
just one or two years.
For this reason, you should carefully read your note
and mortgage documents, in particular the prepayment penalty clause to
understand conditions which would apply to your loan. The loans which
will
carry a prepayment penalty often penalize you only for paying off the
loan
early in the first five years, and thereafter a graduating scale may
apply,
or there may be no prepayment penalty at all after that initial five
year
period.
To find out if your loan will have a prepayment penalty you should
first
look at the type of loan you will be acquiring. Traditional loans
with fixed
rates of interest usually do carry a prepayment penalty while loans
with an
adjustable interest rate generally do not carry the prepayment clause.
There
are some types of home loans which re prohibited by law from charging
prepayment penalties. These loans include FHA and VA loans and
federally
chartered credit union loans. Prepayment penalties are illegal in some
states, so you may want to check with your lender or attorney for the
laws
which apply for your state.
To find out if your loan will have a prepayment penalty, ask your
lender
when you first apply for your loan. Ask how much the prepayment
penalty will
be if there is to be one, and for what period of time it will apply.
Prepayment penalties can run between 2 to 4 percent of your loan
amount.
While you may have no intention of selling your house in the near
future, and
feel that a prepayment penalty would not really be an issue for you,
consider
the possibility of your refinancing you loan within the 2 to 5 year
period of
time. Interest rates may drop and you may want to refinance your
loan, in
which case the prepayment penalty could become an issue.
It is best to find out all the details about any prepayment
penalty which
may apply to your loan before you sign your loan documents. Ask
questions,
and if there is to be a penalty, ask if the lender would consider
waiving the
prepayment penalty for you. You never know when your circumstances
may
change and you may want to pay off or refinance your existing
mortgage. |
