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If you’re shopping for a home right now, surely you’ve heard the news: Interest rates are up, and they’re only expected to go higher.
That limits a homeowner’s buying potential, and it means you want to keep other costs to an absolute minimum. Here’s one you may not have even heard of: A mortgage prepayment penalty. It’s a fee that some mortgage lenders charge, and you might want to try to avoid.
Here’s everything you need to know about these penalties, and how to work around them.
What Is a Prepayment Penalty and How Does it Work?
“A mortgage prepayment penalty is a fee that some lenders are going to charge when you pay all or part of your mortgage loan off early,” said Michelle Petrowski, a certified financial planner in Phoenix. “This is really to ensure they don’t lose all the interest they were expecting to get.”
This often happens when a borrower takes out a mortgage, only to sell the home and pay it off within a couple of years. The simple reason behind the penalty is that a lender puts in a lot of legwork to originate a mortgage, and they want to recoup that cost in the form of interest — something that wouldn’t happen if you paid off your entire mortgage early.
Each lender will have different policies about how and when prepayment penalties apply. And it typically doesn’t kick in if you make an extra payment here or there. But if you pay off the entire loan, or a large chunk of it, early, the lender would charge you an extra fee.
Which Loans Have Prepayment Penalty Fees?
Not all loans are created equal. Whether a loan has prepayment fees has a lot to do with what type of mortgage it is, and who the lender is. Here’s how to know the difference:
Loans that don’t have prepayment penalties
There are certain types of loans that never have prepayment penalties: FHA loans, VA loans, or USDA loans. In other words: Government-backed mortgages are not allowed to charge prepayment penalties.
Loans that could have prepayment penalties
Most other loan types are eligible for prepayment penalties. Again, it depends on the lender and your specific situation, but conventional loans and especially investment loans could have …….
Source: https://time.com/nextadvisor/mortgages/mortgage-prepayment-penalty-how-to-avoid/