Prepayment Penalties On Mortgages

When breaking your mortgage contract early, usually because of a refinance or the sale of your home, you will unfortunately have to pay your lender a penalty called a prepayment penalty. The amount you pay will depend on a variety of factors including the day you signed your original mortgage contract, the term of that contract and your existing mortgage balance, rate type and mortgage rate.

What Is a Mortgage Prepayment Penalty? A prepayment penalty is a provision of your contract with the lender that states that in the event you pay off the loan entirely, you will pay a penalty. Penalties are usually expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest.

Originating consumer mortgage loans is expensive. To protect themselves from financial loss, lenders use prepayment penalties, which are contractual clauses that state the borrower is going to pay the lender an additional fee if the borrower pays the loan off early. Learn more.

What is a mortgage prepayment penalty? A prepayment penalty is an agreement between the borrower and lender that informs how much and when the borrower can pay off the loan. The penalty is based on a percentage of the remaining mortgage balance or a certain number of months’ worth of interest.

Mortgage prepayment penalties can cost you thousands if you sell or refinance too early on in your home loan. Learn about how and why many mortgage lenders calculate prepayment penalties and what options you have to avoid paying them.

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A prepayment penalty is a financial limitation placed on a mortgage limiting a borrower’s ability to prepay his loan earlier than specifically allowed under the terms of his agreement. Prepayment penalties place financial disincentives on borrowers securing alternate loans to repay their existing loans, and as such, refinancing loans to pay off.

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Fundamentally, a mortgage prepayment penalty is applied by lenders to recover some of the profit they would have made were the loan to have.

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