Mortgage lenders make money primarily through interest payments, which means many loans come with a mortgage prepayment penalty. And while not impossible to prepay your mortgage, it’s important to understand prepayment penalties and how they work.
Some lenders charge prepayment penalties for paying out the loan balance in one payment. Penalties will differ depending upon the loan’s length and the corresponding interest charges. Some utilize the remainder of your outstanding loan balance, while others can use sliding payments based on time you’ve spent repaying your mortgage.
Prepayment penalties are meant to keep borrowers from paying off their loans before the end of the loan term. In some cases, they can reduce the benefits of eliminating the debt and avoiding interest. Prepayment can also cause temporary damage to your credit score.
However, not every loan includes a prepayment penalty clause. Regardless of whether you anticipate refinancing or paying your mortgage early, it’s important to understand the terms and conditions from your lender.
There are a few ways lenders calculate a prepayment penalty. Often, it can be a small percentage of your remaining balance. This means you’ll pay a higher penalty the sooner you pay off the loan.
As mentioned earlier, some lenders will charge a certain number of months’ worth of interest, while others use a sliding scale based on the length of the mortgage. It’s also possible for a prepayment penalty to be a fixed amount, though this is more common in personal loans compared to mortgages.
How does the math actually work for prepayment penalties? For a percentage of the remaining balance, consider a mortgage loan of $200,000. If the penalty is equal to 2%, and you’ve only paid $20,000 of the loan amount (10%), your penalty would come to $3600:
200,000 - 20,000 = 180,000
180,000 x 2% = 3,600
There are definite advantages to paying off a mortgage early. However, it’s crucial to understand the terms of your loan and whether a prepayment penalty fee is something you need to consider.
In twenty five years of real estate sales and marketing experience, I have sold hundreds of properties, while developing detailed knowledge of Sonoma & Napa area communities. I am a life-long resident in the North Bay and after a full day at work, I enjoy spending time with my four children, and participating in their many school and recreational activities.
Over the years, my clients have expressed diverse plans and dreams. I seek to truly understand and appreciate my clients' goals, focusing my efforts on realizing them. It has been fun learning more about the unique opportunities that attract people to the area such as the culinary community, the viticulture and wine industry as well as outdoor adventure tourism. It is important to me to listen to my clients, do what it takes to serve their needs and I am dedicated to treating everyone involved in a transaction both in a personal and professional manner. I work hard to anticipate and respond to the routine tasks at hand as well as the complex challenges that come up during real estate transactions while ensuring my goal to deliver you the outcome you desire.