Have You Asked Your Mortgage Broker About Prepayment Penalties?
Home loans can have prepayment penalties. Depending on your intentions, such clauses can be either painful or inconsequential. You don't have to plan everything you do with your home loan before you take it. Still, prepayment penalties are another reminder that a bit of forethought can boost your chances of finding the perfect home loan through your mortgage broker.
What Is a Prepayment Penalty?
Prepayment penalties might sound self-explanatory. However, the Consumer Financial Protection Bureau says one of these clauses can be quite different from another. Sometimes, you're penalized if you pay your entire home loan too soon. Other times, you're penalized if you pay too much all at once. Whatever the case, you can't avoid prepayment penalties unless you know what to expect. As always, scrutinize home loan terms before signing.
As for why prepayment penalties exist, you should know it's a matter of profit. Lenders carefully set their interest rates and other lending conditions to make money without putting themselves at too much risk. Paying loans early throws off those calculations. As a result, lenders add prepayment penalties to discourage early repayment while protecting their profits in case it happens anyways.
Why Should You Care About a Prepayment Penalty?
Generally speaking, prepayment penalties are bad because they limit what you can and can't do with your home loan. Due to this, you might miss out on beneficial opportunities available through your mortgage broker.
For instance, you might find it harder to benefit from refinancing your home loan. This is because prepayment penalties raise the threshold needed for opportunities to prove beneficial. After all, Bankrate points out that refinancing involves paying an old home loan using a new one, meaning you might be penalized if you've just taken the latter. Even if you're coming out ahead on the deal, you're still losing compared to what you could've gotten without the prepayment penalty.
Similarly, you're often encouraged to pay more than the monthly minimum on your home loan. A portion of your payment covers your interest. Afterward, the remainder goes to your principal. You should pay more than the monthly minimum because a smaller principal makes for less interest, thus resulting in long-term savings. Unfortunately, you might not have this option if you risk prepayment penalties for paying too much too fast.
Due to this, you should evaluate what prepayment penalties are worth to you. If you're considering early payment, you should ask your mortgage broker for a home loan without prepayment penalties, though you might have to accept worse borrowing conditions in other respects. Always run the numbers to give yourself a more objective basis for your decision-making.
Prepayment penalties aren't a concern for everyone. You won't trigger them by sticking to monthly minimums for the foreseeable future. Still, it's always good to have more freedom of action. As such, you lose nothing by asking your mortgage broker about prepayment penalties and similar issues.
Talk to a mortgage broker to learn more.