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Mortgage Prepay Penalties can be Hard or Soft

Hard Prepays mean that selling or refinaning your property before the prepay period ends will trigger the prepayment penalty.

Soft Prepays mean you may sell the property but not refinance before the prepay period ends without a penalty.

Prepay penalties reward borrowers with rate discounts for keeping their mortgage an agreed minimum time period. They also penalize borrowers who fail to honor their commitment.

If you have a high degree of certainty you will remain in the same home/loan for the minimum time period, prepays can help you save money by discounting your mortgage rate. If your job or finances are less certain prepays may not be for you. For adjustable rate mortgages (ARM's) it's a good idea not to agree to prepays longer or equal to the 1st adjustment period. After the prepay drops off you'll be glad to have time to shop for another loan before your rate/payment changes.

For those with ARM's scheduled to increase, consider using prepays with a new fixed rate mortgage to bring down the rate closer to what you are used to paying. Then you don't have to worry about future rate increases.

Can't get near your current rate even with a prepay? Consider using equity to pay discount points & lower your new fixed rate even further. See my seperate blog on points for more information.

Greg Zaccagni @ www.MortgageAdvisor.info

Posted by Illinois Mortgage Lender Greg Zaccagni on 08/05/2007 10:57 AM

Comments (7)

prepayment penalties, privleges, hard prepays, soft prepays, mortgage refinance

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Post is included in group: WEIRD LOAN AND COMMERCIAL MORTGAGE FORUM

7 Comments on Mortgage Prepay Penalties can be Hard or Soft

AUG

2007

What bothers me is the number of former title companies that do not explain this during the closing process. Notice I say former title companies, see if I have to bring it up to my buyers it is the last time I use that company.

See too many people are finding out they have a Hard Prepay

Paul:

Thanks for commenting. None of these mortgage "tools" are bad however, the consumer needs to understand the consequences of each option to decide whether the risks are worth the interest rate savings.

I hope my blog serves to help explain how prepays can cause one rate quote to be lower than another to your clients. A separate blog lists common questions consumers should ask about their mortgage rate quotes before sending documents or paying for appraisals. Please see link below.

Greg Z.

http://localism.com/article/150361/All-Mortgage-Rates-Are-NOT-Created

Greg -- Thanks for the post and it the prepay runs with the adjustment period of the mortgage, it probably got the buyer a slightly better interest rate. Aloha

AUG

2007

Hi Greg,
Just make sure we get all the facts up front please. I agree they are not bad, but clients do need to know and understand what they are getting. Thank you for educating.

Cynthia:

I couldn't agree more about being up front with clients. Lenders are required to disclose prepay terms at the same time they provide GFE's. Using a "Trusted Mortgage Advisor" is the best way to be certain your borrowers knows exactly what they are getting. I'm available - should you have any vacancies?

Greg Z

AUG

2007

Good information. That said, in today's market even with hard or soft pre-pays it may make financial sense to pay the pre-pay penalty now to get out of the mortgage that you are currently in. for some consumers it's worth a visit to their mortgage consultant.

Kate:

Thank you for your comment. As prepays are discounted interest, logic follows that individuals who choose to break the contract may be able to deduct the penalty from their taxes - taking some of the sting out. Your clients should consult their tax advisor if they wish to consider this. Nonetheless, the money to pay for the penalty needs to come from somewhere. Those with higher LTV's (at or above 80%) need consider whether doing so will push them into a higher mortgage interest rate bracket and/or Private Mortgage Insurance (PMI).

Greg Z.

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