Question:

What is hard and soft mortgage pre-payment penalty?

Answer:

A mortgage pre-payment penalty is a clause in your mortgage agreement stipulating the conditions of exit from the home loan. The home loan prepayment penalty can be a hard figure, as $10,000 cash; or percentage of interest or percentage of the outstanding loan balance.

A hard mortgage prepayment penalty refers to sale and refinancing; a soft penalty refers to refinancing only. Usually, up to 20% of principal is allowed to prepay in any year, but not every lender will support this.

What is important about mortgage pre-payment penalties?

Mortgage prepayment penalties apply usually for the first several years (up to five) of the loan. It is sometimes reasonable to accept a soft prepayment penalty for a rate decrease. However, hard mortgage prepayment penalties are not recommended to accept.

Subprime mortgage loans usually have prepayment penalties.

For subprime loans, a costly mortgage prepayment penalty may tie you up more than you would like. A prepayment penalty of $10,000 and more for a bad credit loan at 11% is not uncommon. Due to high origination and loan costs, a subprime lender will charge a penalty. The only thing a borrower can do to offset the effect is to name their terms and stand up for them.

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