Question:

Do all mortgages have a prepayment penalty rider?

Answer:

Not all mortgages have a prepayment penalty rider. Only mortgages with a prepayment penalty condition have a prepayment penalty addendum.

Where Can I Find the Prepayment Penalty Rider

The prepayment penalty rider is an attachment or an addendum to a mortgage promissory note (i.e. the mortgage note). It can be found with the rest of the mortgage closing documents.

  • If you are just about to apply for a mortgage, ask your loan officer if the loan has a prepayment penalty condition. If it does, ask for an explanation and decide whether or not you agree with the prepayment penalty terms. Better yet, just look for another mortgage.
  • If you have already submitted your mortgage application, you will receive the Truth in Lending disclosure statement. Look for the PREPAYMENT section to see if your mortgage "may" have a prepayment penalty condition. Ask your loan officer for the prepayment penalty terms and decide whether or not you wish to proceed with your mortgage application.
  • If you are about to close the mortgage, look for the prepayment penalty rider to learn the specific prepayment penalty terms. If you do not agree with the prepayment penalty conditions, do not close the deal. Look around for another mortgage.
  • If you already have a mortgage, look for the prepayment penalty rider in your closing documents. If it exists, then you have apparently agreed to the lender's prepayment terms. If you want to negotiate the prepayment terms, call your lender.

    Unfortunately, this will probably not change anything. The best course of action, in this case, is to comply with the prepayment terms so you can avoid the penalty. You may also consult a legal professional if the loan officer or the lender employed deceptive practices to get you to sign the prepayment penalty rider.

Why is the prepayment penalty rider important?

A prepayment penalty means a higher potential cost on your part. If you have agreed to a prepayment penalty, you can't immediately refinance your home even if a great opportunity to do so comes along. Your choices would be to:

  • continue paying steep interest charges even when a better option is available, or
  • pay the equally steep prepayment penalties to refinance

Whichever you pick, you lose. You may also be charged a prepayment penalty for selling your home within the prepayment period if your prepayment penalty rider does not have a home sale exemption.

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