When a home buyer gets involved with buying a home, thoughts usually tend to center on staying in that home for a lengthy period of time, building both a family and equity. However, as we all know, your life can change in an instant and you never know when the next great job offer or life change will be presented, prompting you to leave town and seek a new beginning. It is those opportunities that prepayment penalties prey on and you should be well aware of what you’re getting in to if they are a feature of your mortgage.
Prepayment penalties typically state that if you decide to pay off the balance of your mortgage within a period of time (generally a few years from the start of the mortgage), you agree to pay a sort of penalty that is usually derived as some percentage of the interest on your mortgage over a period of time. The penalties serve loan agencies well as they seek to get some profit out of your loan even though an owner has decided to end it early, but they do a disservice to the home owner.
Naturally, you should be aware of all of the aspects of your home loan, but the section discussing prepayment penalties is perhaps one area to pay special attention to. These penalties can cost as much as a handful of monthly payments, so they do represent a significant cost. Every loan is negotiable and it is up to you and your realtor to make prepayment penalties at the very least a topic of discussion.
Much of the time, eliminating the prepayment penalty from your loan may be too difficult or the bank may ask for too much in return, so negotiating down the lengths and amounts involved could be a workable solution for both sides. Negotiating a smaller window of penalty or a smaller amount of penalty can at least make you feel that you’ve addressed the situation and if you negotiate down the window enough, can probably make you feel safe from having to pay a penalty.
If you are currently paying on a mortgage with a prepayment penalty and have a lot of that time window left to go, you may think about getting creative with how you deal with the penalty should you have to endure it. If you have a new home with new financing set up, you can elect to roll that prepayment penalty cost into the amount of your new loan to possibly get interest benefits if rates have gone down.
You can also contact your lender or real estate agent if the window is close to expiring but not fully up to see if the cost can be waived and, if so, what the bank would want in return. Perhaps financing a new property through the same bank will entice them to waive the prepayment penalty in favor of getting your repeat business. You’ll never know until you ask or your realtor pursues the matter, so it is always best to at least give it a try.
As with every step of the home buying and home ownership process, having full information with leave you better equipped to make decisions in the future. There are hundreds of little items that must be at least thought about and the presence of a prepayment penalty in your mortgage is one such item. Ask the right questions and make some attempt to negotiate down the terms of the penalty if your lender insists on making prepayment penalties a part of the mortgage. You’ll be glad later if a life-changing opportunity comes along later and you are free to pursue it without enduring the added cost of mortgage prepayment penalties.
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