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.
Ted draws energy and joy from building synergetic relationships with his Clients. Ted's nature is graciously gregarious and persevering; he's honest; and he's been dedicated to a substantial list of clientele throughout his 25 years in the hospitality business and almost two years as a REALTOR. His passion is creating a sincere, successful relationship with people.
Ted grew up in a family of Realtors in central Indiana, earned a degree in economics and philosophy from the University of Notre Dame, and jumped into all aspects of the restaurant business. His ensuing hospitality career path eventually led him into the Event Management Sales & Service role in hotels and quickly guided him to Los Angeles, San Francisco, and finally to a luxury resort in the Napa Valley, where he, his husband, and their dog have resided for almost a decade now.
The irony is not lost on Ted that his ‘growth’ journey has culminated in“living happily ever after” in an agricultural area with a small-town feel and sense of community strikingly reminiscent of his youth…and as a REALTOR nonetheless!