Hard Prepayment
Penalty - A hard penalty applies to the loan throughout the term of
the loan, irrespective of how the loan was retired. If you refinance,
sell the home or even make additional principal payments, you will
most likely incur a prepayment penalty. Hard prepayments mostly apply
to offset other borrower conditions such as damaged credit or difficult
to prove income. It also tends to assure that the lender optimizes
more interest from the loan.
Pre-payment penalties in general can save you thousands of dollars
over the life of the loan if you plan to keep the loan in place
for many years. One of the biggest questions that needs to be answered
for, not only determining your pre-payment penalty, but also what
loan program to choose is how long you plan to stay in the home.
In most states that allow a hard prepayment penalty, the period
is usually 3 years. The penalty differs depending on the loan program,
but it is usually 6 months of interest. A "hard" prepayment means
that if you refinance, sell, etc. before the time period you are
charged the penalty. Some programs offer "soft" prepayment penalties
and in that case you are only charged the penalty if your refinance,
not sell.
If you currently have a mortgage with a prepayment penalty we can
discuss this with you to see if it is right for you to refinance
or not. Some companies will allow a prepayment penalty to be waived
if you refinance with the same lender.
Borrowers when deciding to apply for a loan should ask if a specific
loan program has a Hard Prepayment Penalty. They will need to decide
what they plan on doing with the property in the future. If they
plan on refinancing or selling in the next few years, they should
consider a different program or buying out the penalty. Also, if
they plan on selling the property in the near future, they could
also consider a Soft Prepayment Penalty which borrowers only incur
a penalty if the loan is refinanced not sold.
The pre payment penalty period is never for the entire length of
loan term. Maximum pre payment periods vary from state to state.
Some states do not allow pre payment penalties at all. Generally
speaking, a pre payment penalty will exist for a period no longer
than 60 months.
There are now many lenders that have step down "hard" prepayment
penalties. This is where the penalty decreases the longer you keep
the loan. For example, there may be a 3% penalty the first year,
2% the second year, and 1% the third year.
