How to get out of a prepayment penalty?


If you have signed a mortgage agreement with a prepayment penalty then the only way you can get out of it is by mutual consent i.e. yours and the lender's consent. Lenders very rarely waive prepayment penalties but you do have a few options. If you follow the steps mentioned below, you should be able to play your cards better.

Steps to Get Out of a Prepayment Penalty

  1. Go through the mortgage agreement in detail (with a professional, if possible). This document will tell you the how much and in what situations will the prepayment penalty be triggered. You might find a way in there to avoid your prepayment penalty.
  2. Contact your lender. Try to find out in what cases do they waive a prepayment penalty. As mentioned before, lenders don't often do that, but trying won't cost you anything.

After you do that you'll essentially have three options.

Options to Get Out of a Prepayment Penalty

Option 1:

The first option is that you refinance your mortgage with the same lender. If you do that there is a chance you might get a waiver on the prepayment penalty because lenders do not like terminating relationships with borrowers.

Option 2:

The second option is that you go to court in order to get the penalty nullified. There is precedence that courts have ordered lenders to waive prepayment penalties deeming them unjust.

However, that has happened very rarely and in any case you'll have to pay the legal fee and that cost might offset the benefit of a penalty waiver. You can use this option as a negotiation tactic though for asking the lender to lessen the penalty if not completely waiving it.

Option 3:

If your waiver request has the support of a public pressure group you might get out of your prepayment penalty. For e.g. some sub-prime community groups intercede on behalf of borrowers if they are convinced that the original terms were unreasonably onerous.

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