N.E.O. Home Loans - Avoid Fees For Paying Off Your Loan Early

Avoid Fees For Paying Off Your Loan Early

The fee in question is called a pre-payment penalty. They can end up costing you thousands of dollars. Lenders will often offer you a lower interest rate in exchange for a pre-payment penalty. You can feel safe with a mortgage from me because not one of my products carry a pre-payment penalty.

What is a Pre-Payment Penalty?

The average pre-payment penalty equals a percentage of the outstanding balance at the time of the pre-payment. Other pre-payment penalties can be calculated as a specified number of months of interest. My policy is to never charge a pre-payment penalty. I highly recommend thinking twice before you agree to a mortgage with a pre-payment penalty, no matter how much lower the interest rate is.

You should always question your lender about this before signing any papers. Make sure they can show you in writing that you have no pre-payment penalty. Once you have signed, it can be very difficult if not impossible to fight your way out of these terms. As always, make sure you review you loan documents very carefully before signing anything so that you can be fully aware of all the terms in your contract.

Borrower Beware

Lenders often offer a borrower a lower interest rate in exchange for a pre-payment penalty. Lenders will use the pre-payment penalty to secure the loan long enough to recover the costs of originating that loan. By adding this fee, they discourage the home owner from refinancing and possibly taking the mortgage to another lender. Let's say interest rates drop and you want to refinance to that lower rate and lower your payment. You can't unless you pay the pre-payment penalty! You end up stuck paying that higher rate while the lender continues to pocket what could have been your savings.

You might be thinking that the duration of the pre-payment penalty is for the same amount of time you plan on living in the home, but no one can predict the future. What if your situation changes and you have to move away? Say your job is transferred or you get a better job offer in another city or state? Selling that house before your pre-payment penalty expires can end up costing you thousands.