From the monthly archives:

October 2008

October 30, 2008

My mortgage carries a prepayment penalty. Does it mean I can make no extra payments at all without being penalized?

You can make extra payments whenever you feel so, but the amounts will be usually limited to the maximum of 20% of the original loan’s balance per year while the penalty period lasts (usually the first 3 or 5 years). Only amounts above the 20% are penalized. When the prepayment penalty period is over you [...]

October 30, 2008

What is the difference between a hard and a soft prepayment penalty?

A penalty that applies to refinancing only is a soft penalty; a penalty that applies to both refinancing and a home sale is a hard penalty.

October 30, 2008

Should I agree to have a prepayment penalty included into my contract?

If your credit score is not very good, I am afraid, you don’t have very much of a choice here. You are forced to do whatever your lender tells you to in order to get the loan. However, try as hard as you can to avoid the hard penalty . Borrowers with a good credit, [...]

October 30, 2008

How much is an average prepayment penalty?

The concrete amount is individual to each case, of course. It depends on the penalty terms agreed upon in the mortgage contract. Sometimes it is a fixed amount (an equivalent of six months of interest, for instance), or a percentage of the outstanding balance, fixed (around 2%) or regressive. For example, the penalty for prepaying [...]

October 26, 2008

Prepayment Penalty

A prepayment penalty is the jack-in-the-box of the mortgaging world. Most times it is equally annoyingly unexpected (for the borrower), but unlike the dumb toy, it may cause people to lose their money, not just make them produce a polite squeak of a laugh. A prepayment penalty, if included into a mortgage contract, states that [...]