{"id":3950,"date":"2023-03-01T05:51:44","date_gmt":"2023-03-01T05:51:44","guid":{"rendered":"https:\/\/frankbuysphilly.com\/what-it-is-and-how-avoid-it\/"},"modified":"2023-03-01T05:51:44","modified_gmt":"2023-03-01T05:51:44","slug":"what-it-is-and-how-avoid-it","status":"publish","type":"post","link":"https:\/\/frankbuysphilly.com\/what-it-is-and-how-avoid-it\/","title":{"rendered":"What It Is And How Avoid It"},"content":{"rendered":"<p> <br \/>\n<\/p>\n<div :class=\"{ 'hidden': $store.proContent.showFullPrompt() }\">\n<section class=\"px-4 relative border border-slate-200 mobile-toc lg:hidden\" x-data=\"{open:false}\">\n<button class=\"flex items-center gap-4 my-2 border-none w-full\"><br \/>\n<svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"h-6 w-6\" fill=\"none\" viewbox=\"0 0 24 24\" stroke=\"currentColor\" stroke-width=\"2\"><path stroke-linecap=\"round\" stroke-linejoin=\"round\" d=\"M4 8h16M4 16h16\"\/><\/svg><\/p>\n<h2 class=\"font-semibold text-slate-800 text-base m-0 js-toc-ignore\">In this article<\/h2>\n<p><\/button><\/p>\n<\/section>\n<p>Did you know you may be charged a prepayment penalty for attempting to pay off your loans early?\u00a0<\/p>\n<p>Prepayment penalties are fees that some lenders charge if you refinance or pay your mortgage off early. Not only are they fairly common\u2014they\u2019re also often misunderstood by borrowers.<\/p>\n<p>In this article, we\u2019ll discuss how a mortgage prepayment penalty works, the types of prepayment penalties you may encounter, and how to avoid paying them.\u00a0<\/p>\n<h2>How Prepayment Penalties Work and Why Lenders Charge Them<\/h2>\n<p>Your monthly mortgage payment consists of <a href=\"https:\/\/www.biggerpockets.com\/blog\/principal-and-interest\" target=\"_blank\" rel=\"noreferrer noopener\">principal and interest<\/a> payments. Principal payments pay down your loan, while the interest payments go to your lender. When you take a loan, your lender expects to make money on those interest payments. Lenders include prepayment penalties in mortgage contracts to make you think twice before prematurely refinancing or paying off your loan.\u00a0<\/p>\n<p>Let\u2019s say you take out a 30-year fixed $250,000 at 5% interest. If you don\u2019t increase or make extra mortgage payments, at the end of 30 years, the total cost of your loan is $483,165. $250,000 for the principal and $233,165 in interest.\u00a0<\/p>\n<p>However, if you suddenly come into money and decide to pay your loan off after two full years, your lender will only receive $22,619.43 in total interest payments. If you instead pay off half of your loan balance, that will significantly reduce how much interest you\u2019ll owe and cut into your lender\u2019s profits.\u00a0<\/p>\n<p>Thankfully, prepayment penalties are becoming less common. Also, your mortgage lender is required to inform you if they are included in your closing paperwork. If your lender doesn\u2019t, they can\u2019t charge for them if you refinance your loan or pay it off early.\u00a0<\/p>\n<h2>Are There Limits on Prepayment Penalties?<\/h2>\n<p>The <a href=\"https:\/\/www.cftc.gov\/LawRegulation\/DoddFrankAct\/index.htm\" target=\"_blank\" rel=\"noreferrer noopener\">Dodd-Frank Act<\/a> imposed limits on prepayment penalties to safeguard property owners from sticker shock. Lenders can only charge a mortgage prepayment penalty during the first three years of your loan\u2019s term. The most they can charge is 2% of your loan\u2019s balance during the first two years of your loan and 1% during the third year.\u00a0<\/p>\n<p>If you are charged a mortgage prepayment penalty during this period, you pay a lump sum fee when you sell or refinance your home.\u00a0<\/p>\n<p>Also, federal law prohibits lenders from charging prepayment penalties if you have an <a href=\"https:\/\/www.biggerpockets.com\/blog\/2013-03-18-fha-mortgage-vs-conventional-mortgage-2\" target=\"_blank\" rel=\"noreferrer noopener\">FHA loan<\/a>, a USDA loan, or a <a href=\"https:\/\/www.biggerpockets.com\/blog\/va-home-loan\" target=\"_blank\" rel=\"noreferrer noopener\">VA loan<\/a>. Student loans are also exempt from these fees.\u00a0<\/p>\n<h2>Examples of Prepayment Penalties<\/h2>\n<p>Let\u2019s say you take a 30-year mortgage loan out on a property for $300,000 with a 5% fixed interest rate. A little after a year, your house skyrockets to a new market value of $350,000, so you decide to sell it even though your lender informed you of your contract\u2019s prepayment penalty clause.\u00a0<\/p>\n<p>At this point, you still owe $295,000. Since you\u2019re selling within the first two years of ownership, your lender charges you a 2% prepayment penalty of $5,900 ($295,000 x 2%). If you wait until your third year, the penalty drops to 1%, or $2,950. After accounting for closing fees and the real estate agent\u2019s cut, is it worth taking in the home another year or two to reduce or eliminate your prepayment penalty? That all depends on your circumstances.<\/p>\n<p>Let\u2019s say you decide to refinance your loan to 4% instead. At 5%, you\u2019ll pay $279,767 in total interest over 30 years. At 4%, you\u2019d pay $215,609 in total interest, a difference of more than $64,000 (excluding interest you\u2019ve already paid to your current lender). It also shaves about $180 off of your monthly mortgage payment.<\/p>\n<p>If your prepayment penalty is the same as the first example ($5,900), you can make money for the fees back in about 33 months ($5,900 \/ $180). If the rates will remain at 4%, it\u2019s likely more worth waiting a year or two\u2014but not always. Rates can fluctuate constantly, so deciding whether you should refinance depends on how much you\u2019ll save in the long term.\u00a0<\/p>\n<h2>Types of Prepayment Penalties<\/h2>\n<p>There are two common types of prepayment penalties you may encounter:<\/p>\n<ul>\n<li><strong>Hard penalties<\/strong>: Prepayment penalties that apply to both refinancing and selling a property.<\/li>\n<li><strong>Soft penalties<\/strong>: Prepayment penalties that only apply to refinancing your property.<\/li>\n<\/ul>\n<h2>How to Avoid Prepayment Penalties<\/h2>\n<p>Luckily, avoiding prepayment penalties isn\u2019t too difficult. Here\u2019s how:<\/p>\n<ul>\n<li>Work with a lender that doesn\u2019t charge a prepayment penalty.<\/li>\n<li>Get a loan estimate that doesn\u2019t include a prepayment penalty.<\/li>\n<li>Negotiate the cancellation of a prepayment penalty with your current lender.<\/li>\n<\/ul>\n<p>You can also make extra payments occasionally without getting charged a prepayment penalty. Usually, these payments only appear on your lenders\u2019 radar when you make a substantial payment (i.e., 20% of your principal or more).\u00a0<\/p>\n<h2>Are Paying Prepayment Penalties Worth It?<\/h2>\n<p>The answer can be yes or no and is decided on a case-by-case basis. Check with your lender to see if your contract has a prepayment penalty clause. Sometimes it\u2019s worth it to keep making regular payments until the clause expires or to invest your money elsewhere.<\/p>\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block    has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n<div class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n<div class=\"relative z-30 w-full \">\n<main class=\"py-4\"><\/p>\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find a Lender in Minutes<\/p>\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">A great deal doesn\u2019t just sit around. Quickly find a lender who specializes in investor-friendly loans that are right for you and your investment strategy.<\/p>\n<p><\/main>\n<\/div>\n<div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n<picture decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  shadow-xl rounded-md hidden lg:block sp-no-webp\" title=\"Prepayment Penalty: What It Is And How Avoid It 2\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Lender-Match.webp\" type=\"image\/webp\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Lender-Match.png\" type=\"image\/png\"><img src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Lender-Match.png\" decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  shadow-xl rounded-md hidden lg:block sp-no-webp\" title=\"Prepayment Penalty: What It Is And How Avoid It 2\" alt=\"find a lender with lender match\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Lender-Match.png\"\/><\/source><\/source><\/picture>\n<\/div>\n<\/div>\n<\/div>\n<p class=\"italic\"><b>Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n<\/div>\n<p><br \/>\n<br \/><a href=\"https:\/\/www.biggerpockets.com\/blog\/prepayment-penalty\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this article Did you know you may be charged a prepayment penalty for attempting to pay off your loans early?\u00a0 Prepayment penalties are fees that some lenders charge if you refinance or pay your mortgage off early. Not only are they fairly common\u2014they\u2019re also often misunderstood by borrowers. In this article, we\u2019ll discuss how [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":3951,"comment_status":"","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[33,1],"tags":[],"_links":{"self":[{"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/posts\/3950"}],"collection":[{"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/comments?post=3950"}],"version-history":[{"count":0,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/posts\/3950\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/media\/3951"}],"wp:attachment":[{"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/media?parent=3950"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/categories?post=3950"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/tags?post=3950"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}