Mortgage lenders make money primarily through interest payments, which means many loans come with a mortgage prepayment penalty. And while not impossible to prepay your mortgage, it’s important to understand prepayment penalties and how they work.
Some lenders charge prepayment penalties for paying out the loan balance in one payment. Penalties will differ depending upon the loan’s length and the corresponding interest charges. Some utilize the remainder of your outstanding loan balance, while others can use sliding payments based on time you’ve spent repaying your mortgage.
Prepayment penalties are meant to keep borrowers from paying off their loans before the end of the loan term. In some cases, they can reduce the benefits of eliminating the debt and avoiding interest. Prepayment can also cause temporary damage to your credit score.
However, not every loan includes a prepayment penalty clause. Regardless of whether you anticipate refinancing or paying your mortgage early, it’s important to understand the terms and conditions from your lender.
There are a few ways lenders calculate a prepayment penalty. Often, it can be a small percentage of your remaining balance. This means you’ll pay a higher penalty the sooner you pay off the loan.
As mentioned earlier, some lenders will charge a certain number of months’ worth of interest, while others use a sliding scale based on the length of the mortgage. It’s also possible for a prepayment penalty to be a fixed amount, though this is more common in personal loans compared to mortgages.
How does the math actually work for prepayment penalties? For a percentage of the remaining balance, consider a mortgage loan of $200,000. If the penalty is equal to 2%, and you’ve only paid $20,000 of the loan amount (10%), your penalty would come to $3600:
200,000 - 20,000 = 180,000
180,000 x 2% = 3,600
There are definite advantages to paying off a mortgage early. However, it’s crucial to understand the terms of your loan and whether a prepayment penalty fee is something you need to consider.
Headline: Tina Broyles: Your Expert Real Estate Agent for Fremont, San Jose, and the Bay Area | eXp Realty
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As a dedicated real estate professional and a long-time resident of the California Bay Area, I have been proudly serving the real estate community since 1987. My mission is to provide my clients with unparalleled professionalism, in-depth market knowledge, and a caring approach that has resulted in a business built almost entirely on referrals.
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I specialize in the vibrant and diverse real estate markets of Fremont, Campbell, San Jose, Saratoga, Cupertino, Sunnyvale, Morgan Hill, Santa Clara, Mountain View, and Milpitas, CA. With over three decades of experience, I have a deep understanding of these communities and can provide you with the insights you need to make informed decisions.
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I believe in giving back to the community that has given me so much. I am a happily married mother of two and a proud grandmother to two beautiful granddaughters, Audrina and Chesney. In my free time, I enjoy golfing, exercising, and my weekly Bible study. I am also passionate about serving the homeless community in Milpitas and supporting our local businesses.
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