What is a Prepayment Penalty?

A prepayment penalty is essentially exactly what it sounds like.  If you have a 30 year home mortgage loan, but pay it off in 25 years, they may be able to charge you a penalty.  These are assessed in some cases where the lender is trying to protect their overall investment.  They base their projected earnings on an assumption of revenue based on the term of your loan and the interest rate you pay.  Looking at these two factors, in addition to the borrowed amount, of course, tells them how much return on their investment they will have over the course of the loan.  If you pay off your home loan early, however, then the lender will miss out on some revenue.

Thankfully, most conventional mortgages, as well as home loan products supported by the Federal Government, do not have prepayment penalties.  But they do still exist, so it is extremely important that you discuss your loan terms thoroughly with your mortgage loan officer or specialist.  Also, be sure to confirm that there is no prepayment penalty during the closing process, BEFORE you sign the paperwork.  Typically, the Truth in Lending Disclosure is where you will see whether or not there is a prepayment penalty, but it could be elsewhere as well, so just be sure to read through your closing documents thoroughly.


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