Mortgage prepayment has its own advantages as well as disadvantages. While it does get you your own home in a time shorter than you had signed up for, it could also get you into trouble with your mortgage lenders. With a mortgage prepayment plan you can actually get rid of a substantial part of your debt in lesser time than you had agreed upon. This kind of an agreement does work in the favor of the debtor but it may not be the case for your lenders. The reason behind this is that since you are paying ahead of time, the mortgage lenders are receiving lesser interest than you signed up for. This is the simplest reason why lenders may charge a prepayment penalty.
What is a mortgage prepayment penalty?
This is a prerequisite that is present in your mortgage contract which lies down that must pay a penalty in the event that you pay up your mortgage fully ahead of time. This penalty may be charged in two ways. The lender could charge this penalty as a percentage on the amount of money that is remaining or could charge you penalty based on the number of months that may be remaining in the term of your loan. This type of penalty can be charged if you are selling your home or are seeking to refinance your mortgage loan. If your contract contains a prepayment penalty clause then it may be considered as either hard or soft. A hard mortgage prepayment penalty states that you cannot make any of the transactions without being charged a penalty. Only in case of a refinance are you subject to a soft mortgage penalty.
How can you avoid mortgage prepayment penalty?
Mortgage penalties can actually be avoided, decreased or even eliminated with time. In fact, theprepayment penalty could be removed completely after five years. You are free to make a payment that goes up to 20% of the balance on your loan in one year. This way you may be able to avoid a prepayment penalty. If you have the option it is advisable that you take it if you are serious about avoiding the penalty. Sometimes lenders offer borrowers who have a good credit rating or those who have a high down payment or maybe both, could be offered an option of penalty that could again help them decrease your rate of interest. This in turn will lower the monthly payment that you make towards your loan.
Sub-prime mortgage borrowers who do not have a good credit or have made low downpayments or are both of these, then the lender may like it for you to have a prepayment penalty laid down in your contract. Lenders are clever to realize that if your credit ratings show improvement you may want to refinance your mortgage to get a lower rate. This is not a good thing for the lenders because they will be incurring losses due to this reason.
Mortgage lenders do not want to incur any losses for lending you the money to buy your house and this is why they lay down the clause of a penalty on sub-prime borrowers who are likely to refinance in the future. It is true that you that you may not be able to avoid the penalty altogether if you want to refinance in the future but you can still negotiate some of the terms of the mortgage prepayment penalty. You could try to negotiate that this penalty only applies for a fixed period of time and that it should not be applied when you sell your home. This may be your only chance to put it in your favor.
Description: Avoiding mortgage prepayment penalty may not be very easy but it is still possible. Find out how you can avoid or minimize your penalties.
Author’s bio: Jonny is a web writer who writes several articles on the mortgage industry. Find his articles in easyfinance.com.