Pros and Cons of a Pre-payment Penalty
What is a prepayment penalty? It is exactly what its name implies; paying your loan off before an agreed upon period of time; one, two or three years is the norm. The amount of your penalty can be calculated in one of two ways; percentage of the remaining loan balance or a certain number of months (usually 6) of interests. There are also two types of prepayment penalties, hard and soft. With a hard prepayment penalty you are obligated to pay this fee, whether you refinance or sell your home, before the penalty period expires. A soft prepayment penalty is not as stringent. You are released from the penalty if you sell your home, but if you refinance the penalty will be enforced. Be sure you know in advance what type of prepayment penalty, the duration, and the lender’s guidelines for your particular loan program. A prepayment penalty will also indicate that the loan program you applied for is an Adjustable Rate Mortgage. Be sure you know the full details of the loan program you are agreeing to. The Note you sign at the closing table will spell out the duration and how the penalty is calculated, but not whether it is a soft or hard penalty. This information needs to be obtained from the mortgage broker you are getting your loan through.
The main advantage in obtaining a mortgage with a prepayment penalty is that the initial interest rate offered may be lower over the duration of the penalty period, saving you hundreds, if not thousands of dollars in interest payments. The savings on your interest payments will depend on the size of your loan; the lower the loan amount, the less you save. The lender is in the business of making money, so if you pay this loan off early, they lose out on the interest they would have collected at the higher rate.
Whether or not a prepayment penalty is a wise decision for you depends on your personal financial goals. Do you intend to keep your home for a long or short period of time? Are you anticipating a substantial increase in income during the penalty period? Will you be able to comfortably pay the mortgage once the interest rate increases? These are questions only you can answer, and by answering them truthfully, you will make a wise decision.
Academy National Mortgage Corporation
Denise Wing C.E.O.
Certified Mortgage Lender
303-987-0622
The main advantage in obtaining a mortgage with a prepayment penalty is that the initial interest rate offered may be lower over the duration of the penalty period, saving you hundreds, if not thousands of dollars in interest payments. The savings on your interest payments will depend on the size of your loan; the lower the loan amount, the less you save. The lender is in the business of making money, so if you pay this loan off early, they lose out on the interest they would have collected at the higher rate.
Whether or not a prepayment penalty is a wise decision for you depends on your personal financial goals. Do you intend to keep your home for a long or short period of time? Are you anticipating a substantial increase in income during the penalty period? Will you be able to comfortably pay the mortgage once the interest rate increases? These are questions only you can answer, and by answering them truthfully, you will make a wise decision.
Academy National Mortgage Corporation
Denise Wing C.E.O.
Certified Mortgage Lender
303-987-0622
posted by Academy National Mortgage at 10:25 AM
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