Question:

How to avoid penalties on prepayment of a home loan?

Answer:

Sometimes early prepayment of a home loan is necessary - either due to market rates falling abruptly, or you are moving to another job in another state or county. Mortgage prepayment penalties can be sometimes very high, especially on subprime loans. Whatever your situation might be, you want to avoid them as much as possible.

Avoiding Prepayment Penalties on a Mortgage

If you don't have the mortgage loan yet, avoiding prepayment penalties on your home loan will be easier - find out whether your mortgage agreement is supposed to include one and negotiate it.

Lenders usually structure home mortgage loans with and without a prepayment penalty.

If the prepayment terms of the home loan are acceptable (say, 3 years with 2% of the original loan amount as a prepayment penalty) and you know you will be staying in your home for this amount of time, it might be worth accepting one and getting a better rate.

If the prepayment charge on your mortgage is unacceptable to you - too long penalty term, or too expensive, either negotiate it with the lender, or ask for a mortgage program without one. Remember: only accept soft prepayment penalties - one that allows house sale without penalizing you.

On the whole, if you know how long you will be staying in your home, explain this to the lender and they may offer you a prepayment penalty clause that does not exceed your planned stay in your house.

Avoiding Prepayment Charges When You Already Have the Mortgage

If you are within a penalty period and you want out of the mortgage on your own accord - move out and sell, or refinance to lower rates, you will have to talk to the lender. Read your mortgage note to find out what the terms are.

If you are selling the house and you have a hard penalty on the agreement it is your fault you ever accepted it. The lender won't back off. However, most borrowers already know to not accept a hard prepay penalty, and yours is very likely to be a soft one. With a soft prepayment penalty, you might be able to refinance to lower interest rates with your own lender, if they still have your loan. Often, a streamline refinance (that is, with little or no closing costs or penalty fees) is possible if you refinance with the same lender.

Also, if you are moving to a new job in another town, or even state, your new employer is probably offering a moving package and covering the mortgage prepayment penalty is likely to be included.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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