Morgage Prepayment Penalty - Calculation - Definition - Information...
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Prepayment Penalties are applicable to these loans only for the 'prepayment term' given in the note. The most common terms are one, two, three or five years (rarely is a Prepayment Penalty Term greater than five years). Additionally, most loans with Prepayment Penalties will still allow 'Partial Prepayments'. A partial prepayment is most often defined as a payment of up to 20% of the due loan balance in any given year.
There are two types Morgage Prepayment Penalties: A Hard Prepayment Penalty or a Soft Prepayment Penalty. A 'Soft Prepayment Penalty' is a prepayment penalty that only applies to loans paid off early by refinancing (so if you sell your property you will not be affected by it). A 'Hard Prepayment Penalty' applies whether you refinance or sell your property.
Is a Prepayment Penalty avoidable? In some cases the answer is yes. However, many 'subprime' loans require the penalty and such loans are not obtainable with out it. Some 'Negative Amortization', 'Option Arm' and 'Hybrid' programs require a Prepayment Penalty as well. What is often the case, however, is that you can get these loans with out the penalty but the rate is simply higher. So, really, these penalties often allow lenders to offer lower interest rates than they would otherwise be able to...if you are being offered a loan with a Morgage Prepayment Penalty be sure to ask your loan officer if you can 'buy down' the penalty so that you are at least able to have a choice in whether or not your loan subjects you to such a penalty.
Other Important Morgage Terms
Qualifying Rate – The interest rate used in calculating the initial morgage payment for purposes of qualifying a borrower. This rate may or may not be the initial or start rate on the loan.
Qualifying Ratio – Requirements stipulated by the lender that the ratio of housing expense to borrower income or housing expense plus other debt service to borrower income cannot exceed specified maximums.
Right of Rescission - The right of refinancing borrowers under the Truth in Lending Act to cancel the deal at no cost to themselves without three days of closing. Note that this right is not extended to Investors refinancing 'Non-Owner Occupied' properties.
Recording -The act of entering documents concerning title to a property into the public records.
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Morgage Prepayment Penalty Info & Calculation
A Morgage Prepayment Penalty is a provision of certain types of loans that require you to pay a monetary penalty in the event that you pay off the loan before a given period of time. The penalty required is generally a specified percentage of the loan balance that was due at the time the balance was paid or---more frequently---the interest due over a specified number of months (usually 6 months worth of interest).Prepayment Penalties are applicable to these loans only for the 'prepayment term' given in the note. The most common terms are one, two, three or five years (rarely is a Prepayment Penalty Term greater than five years). Additionally, most loans with Prepayment Penalties will still allow 'Partial Prepayments'. A partial prepayment is most often defined as a payment of up to 20% of the due loan balance in any given year.
There are two types Morgage Prepayment Penalties: A Hard Prepayment Penalty or a Soft Prepayment Penalty. A 'Soft Prepayment Penalty' is a prepayment penalty that only applies to loans paid off early by refinancing (so if you sell your property you will not be affected by it). A 'Hard Prepayment Penalty' applies whether you refinance or sell your property.
Is a Prepayment Penalty avoidable? In some cases the answer is yes. However, many 'subprime' loans require the penalty and such loans are not obtainable with out it. Some 'Negative Amortization', 'Option Arm' and 'Hybrid' programs require a Prepayment Penalty as well. What is often the case, however, is that you can get these loans with out the penalty but the rate is simply higher. So, really, these penalties often allow lenders to offer lower interest rates than they would otherwise be able to...if you are being offered a loan with a Morgage Prepayment Penalty be sure to ask your loan officer if you can 'buy down' the penalty so that you are at least able to have a choice in whether or not your loan subjects you to such a penalty.
Other Important Morgage Terms
Qualifying Rate – The interest rate used in calculating the initial morgage payment for purposes of qualifying a borrower. This rate may or may not be the initial or start rate on the loan.
Qualifying Ratio – Requirements stipulated by the lender that the ratio of housing expense to borrower income or housing expense plus other debt service to borrower income cannot exceed specified maximums.
Right of Rescission - The right of refinancing borrowers under the Truth in Lending Act to cancel the deal at no cost to themselves without three days of closing. Note that this right is not extended to Investors refinancing 'Non-Owner Occupied' properties.
Recording -The act of entering documents concerning title to a property into the public records.