Home > Mortgage Loans > Mortgage Prepayment Penalty: Get rid of High Interest Rates
Mortgage Prepayment Penalty: Get rid of High Interest Rates |
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Online mortgage loan companies are doing a
roaring business. Today you can find many online mortgage loan sites and you will be in a fix to choose from them. You may be in a dilemma while going to purchase a property--you want to know the answer to a thousand questions. Just turn to the Internet for instant answers to your queries and solutions to your problems. Online mortgage companies function on the same lines as ordinary mortgage loan companies. You can finalize the deal with any mortgage company across the world. Before taking up a mortgage, it is necessary to go through many documents. You will have to spell out under different headings like your salary/income, tax relief, any other mortgages loans you may have, your assets and mortgage loan accounts, etc. Each of these details should have an accompanying documentary proof of the same. So, if you fail to pay back, a prepayment penalty is a provision of your contract with the mortgage loan 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. Usually, prepayment penalties decline or disappear with the passage of time. Seldom do they apply after the fifth year. Partial prepayments of up to 20% of the balance usually are allowed in any one-year without a penalty. A penalty that applies to a home sale and a refinancing is a hard penalty; if it applies only to a refinancing, it is a soft penalty. The rate quotes indicate you are a prime mortgage loan borrower--meaning your credit is good and/or you are making a very large down payment. Prime mortgage borrowers usually get a better interest rate if they accept a prepayment penalty. Mortgage loan lenders and investors who buy loans from mortgage lenders in the secondary market are willing to accept a lower rate in exchange for a prepayment penalty. The benefit of a prepayment penalty is that it discourages refinancing if interest rates decline in the future. Most prime mortgage borrowers avoid prepayment penalties, either because they can or because they are never offered the option. Loan officers usually press to close as soon as possible, and offering options slows down the process. The upshot is that many prime mortgage borrowers, who would elect a prepayment option if they understood it, never get the chance. You may be a good candidate because you attach a high value to the lower rate. The question you must consider is what you are giving up? How large is the penalty? How many years must elapse before it goes away? Does it apply only to refinancing--you don't want to be subject to penalty if you sell your house. A 2%-3% penalty during the first 3-5 years, payable only on a refinancing, is a reasonable price to pay for a .25% reduction in rate. When the mortgage lender sells your loan in the secondary market, it might be worth 1% more with the prepayment penalty clause than without. That would, roughly, double his profit on the deal. But a prepayment penalty should carry a benefit to you perhaps a 1/8% reduction in the interest rate. Your current intentions regarding refinance in the future are wholly irrelevant. If rates drop from 6% to 4%, you will probably refinance. Investors in the secondary market understand that, even if you don't. It is why they are willing to pay a premium price for a penalty clause that discourages refinancing. Assuming you negotiate a penalty with the mortgage loan lender, make sure a provision to waive the penalty if the house is sold is incorporated in the note. The mortgage loan lender who ends up owning your loan won't know anything about any oral promises. Sub-prime mortgage borrowers profit from refinancing if their credit rating improves, even when the general level of mortgage rates does not change. Prime mortgage borrowers can profit from refinancing only if market interest rates decline. If you make all your payments on time for the next two years, and assuming no change in the general market, you might be able to refinance your 11% loan at 7%-8%. But your current mortgage lender wants to keep your 11% loan for more than two years. Because of high origination costs and high default costs, sub-prime lending is not profitable if the good loans walk out the door after only two years. But that doesn't mean you have no negotiating power. While you may not be able to negotiate away the penalty entirely, you will probably be able to negotiate the specifics. Tell the loan officer: No longer than 5 years; no higher than 3%; partial prepayments up to 20% of the balance allowed in any year without penalty; no penalty on sale of the property. Be forceful but nice. Keep in mind that the lender wants to close your loan. |
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