If you’re thinking about taking advantage of a lower interest rate, a mortgage refinance may be in your future. But before you make the switch, you may want to know how to avoid a mortgage prepayment penalty – a hefty fee some lenders charge for repaying your loan too early. Here’s everything you need to know about the penalty fee before making any financial decisions.
What is a mortgage prepayment penalty?
A mortgage prepayment penalty is exactly what it sounds like: a fee you’re charged for paying off your mortgage loan before the end of your term. Mortgage lenders make money by charging borrowers interest and when the lender agrees to fund the loan, they’re planning to make money over the entire term: typically either 30 or 15 years. If you pay the loan off early, the bank makes less money, so many opt to charge borrowers prepayment penalties for paying it off in full.
Prepayment penalties are meant to incentivize homeowners away from refinancing in the earliest (and highest-interest earning) years of the loan, with many mortgage lenders reducing the penalty percentage each year until it goes away completely after a set length of time.
You can use Credible as your refinance guide. Their online marketplace allows you to compare multiple mortgage lenders at once and find the best refinancing deals available.
How to avoid a prepayment penalty
The only way to completely avoid a prepayment penalty is to ensure your lender doesn’t charge one. Many lenders advertise “zero prepayment penalties” in their marketing as a way to entice borrowers to work with their institution. Part of interest rate shopping and conducting proper due diligence is to shop rates with multiple lenders and examine the loan estimates.
Borrowers can shop with multiple lenders in one place via Credible in order to find out what kind of rates they currently qualify for…Read more>>