What Are Pre-Payment Penalties?

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A pre-payment penalty is a penalty charged if the mortgage loan is paid off in its entirety earlier than the specified term of the loan. Pre-payment penalties are calculated as a percentage of the outstanding balance at the time the loan is paid off or as a certain number of months of interest and usually disappear over time.Pre-payment penalties apply to home sales as well as refinance transactions. For home sales, a pre-payment penalty is sometimes referred to as a "hard" penalty. For refinances, it is sometimes referred to as a "soft" penalty.If you are a sub-prime borrower, or a borrower with less-than-perfect credit, a pre-payment penalty may be required because of the fact that sub-prime borrowers carry a higher risk to the lender. But even so, if you're a sub-prime borrower, you may be able to negotiate the terms of the pre-payment penalty.The benefit to lenders charging a pre-payment penalty is not only to protect them from risk, but also discourages the borrower from refinancing should rates drop in the future.However, prime borrowers, or borrowers with good credit and who make a large enough down payment, usually can get a better interest rate if they accept a pre-payment penalty. If you are a prime borrower, ask your mortgage banker about accepting a pre-payment penalty in exchange for a lower interest rate.Some lenders, such as Quicken Loans, the nation's largest online lender, don't charge any pre-payment penalties. Also, depending on the type of loan program and whether or not your state allows them, pre-payment penalties may or may not even be charged.Be sure you ask your mortgage lender lots of questions before closing. Make sure you know exactly what fees you will have to pay upon closing as well as any other charges that may be incurred, such as pre-payment penalties. Then at the day of closing, don't just sign the loan documents without reviewing them carefully. Be sure you read each page carefully and are aware of all the terms of your contract.  Mortgage News Home Current Headlines Next Article  Refinancing | Home Loans | Home Equity Loans | My Quicken Loans Login Mortgage News | Mortgage Rates | Mortgage Calculators | Apply Online About Us | Careers | Contact Us | Feedback | Site Map | Help | Search Security and Privacy | Disclosures and Licenses | Terms of Use © 2000 - 2006 Quicken Loans Inc., All rights reserved. Lending services provided by Quicken Loans Inc., a subsidiary of Rock Holdings Inc. “Quicken Loans” is a registered service mark of Intuit Inc., used under license. Build 3218 2006-01-23 16:43:34

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