Some mortgage notes contain a prepayment clause. What is it? This s a clause in the mortgage that requires that the borrower pay a prepayment penalty against the unearned portion of the interest for any payment made ahead of schedule.
Lenders are forward thinkers. When a lender writes a loan, if they think the borrower will likely pay the loan off early, there is a heavy chance there could be a prepayment penalty on the loan.
In the past couple years, during the hot subprime market craze, we have seen many subprime lenders putting a prepayment penalty on their loans. For example a lender may offer a borrower a 2-year fixed rate mortgage, however there may be a prepayment penalty if they pay it off before 2 years. Typically it is found in the subprime mortgage market where the lender knows the borrower has no other options. The problem comes now when the values in homes are not rising at the same rate of appreciation they were a year ago. Now, when those same subprime borrowers are trying to refinance out of their adjustable ARM's, they are loosing equity when trying to buy out their prepayment penalties.
On the seller's side, this is also a problem. Sellers who have a prepayment penalty on their loan now have to sell the home for enough to cover their penalties at closing.
From a REALTOR's prospective, it is always important to ask sellers if they have a prepayment clause in their mortgage to prevent troubles when it comes to closing. If a seller doesn't disclose this information upfront, even though it may be because they didn't remember, they can have a hard time understanding why they are getting less money back then originally estimated on their NET sheets.
An important fact about prepayment penalties is lenders may not charge them on mortgage loans insured or guaranteed by the federal government or on loans which will be sold to Fannie Mae or Freddie Mac (Conventional Loans).
My best advice:
For home buyers in Tampa, Hillsborough County, Florida or any city in the U.S.: Be sure to ask your mortgage provider if you loan has prepayment penalty. If they say "yes", get a second opinion. This penalty could give you major pain down the road.
For home sellers: Check your mortgage document, specifically your NOTE, to see if you have a prepayment penalty. Make sure you figure this into your mortgage payoff in the beginning.
For REALTORS: Make it a point to ask your sellers if they have a prepayment penalty. If they are unsure, ask them to dig out their mortgage documents or order a payoff right away. You don't want to get to the closing table with your sellers and deal with this issue.
If you have a question about your current mortgage or a mortgage you are considering taking, feel free to email me at LRoss@AmeriFirst.com for a complimentary mortgage review.
~Read more about Prepayment Penalties on My Tampa Bay Mortgage Blog