What is a mortgage loan pre payment penalty?


A mortgage loan pre-payment penalty is a clause in the contract that announces the right of the lender to charge you certain amount of money if your loan is paid off early in a big lump sum. That usually happens when consumers refinance, or sell their house.

Lenders will charge a pre payment penalty

  • In cash - say, $7,000 upon prepayment on refinance;
  • As a percentage of the loan - 5% on the loan, for example;
  • Or as an interest charge for, say, six months.

Home loan prepayment penalties can be huge on subprime loans.

Subprime mortgage loans are riskier to the lender and to the investors buying those mortgages on the secondary market. They are also expensive to underwrite and expensive to the lender to service them. Therefore, large mortgage prepayment penalties on bad credit loans are not uncommon.

These are the common Option ARM loans that gained bad reputation in the lasting subprime mortgage crisis. It is too bad that many of those Option ARMs are predatory loans that finally force borrowers in foreclosure - in part due to existing prepayment penalties that are charged for a refinance and borrowers can't afford to pay to get out of a loan which payments they cannot afford to make after the rate is adjusted.

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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