Home > Blogs > Greg Zaccagni > Greg 's Blog

Mortgage Prepay Penalties can be Hard or Soft

By Greg Zaccagni

Mortgage and Lending with The Federal Savings Bank

August 05, 2007 03:57 AM

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

Comments(7)

Comment

Show All Comments

Sort:

Paul Moye

Benchmark Realty - Franklin, TN

Broker, GRI, SRES

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

Aug 05, 2007 04:09 AM

Greg Zaccagni

The Federal Savings Bank - Wheaton, IL

Illinois Mortgage Lender

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

Aug 05, 2007 05:52 AM

Bruce Bourgault, Vice President, Mpro

Central Pacific Homeloans - Honolulu, HI

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 05, 2007 08:02 AM

Cynthia Tilghman, Realtor® Onslow County NC Home Specialist

Kingsbridge Realty, Inc - Hubert, NC

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.

Aug 05, 2007 11:38 PM

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 06, 2007 01:18 PM

Kate Bourland

Marketing with Kate - Redding, CA

Onlilne Marketing Mobile Marketing

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.

Aug 19, 2007 12:12 PM

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).

Aug 19, 2007 12:42 PM

Mortgage Prepay Penalties can be Hard or Soft

Comments(7)

Greg Zaccagni

Recent Posts

Additional Information