Pre-Payment Penalties

When getting a home loan, make sure you ask if there is a pre-payment penalty.  When going over your home loan documents, keep your eye out for a pre-payment penalty.  Pre-payment penalties are many times, attached to an adjustable rate mortgage (ARM).  Penalties vary but can be as high as 3 percent of the outstanding balance.  ”Soft” pre-payment penalties are those in which you pay only if you refinance your home, but not if you sell the home.  ”Hard” pre-payment penalties are those you pay whether you refinance or sell the home.

A partial pre-payment penalty stats that you are allowed to pay off part of the outstanding principle each year without a penalty.  Typically, you will see that no more than 20 percent of the outstanding principle can be paid each year without a penalty.

Make sure you know all the ins and outs of the pre-payment penalty.  These penalties can be huge moneymaker for the mortgage broker, mortgage banker, and for Wall Street.  The longer the period, the more money the broker makes for selling the loan, and the more money the loan is worth on the secondary market.

Don’t let yourself get fooled. Read the fine print.