Prepayment Penalties on Adjustable Rate Mortgages
You should be aware that on some loans there is a prepayment penalty on adjustable mortgages. Since the lender hopes to make money from the interest charges on your loan, if you pay the loan off early, the lender will not make as much money. If you lock into a mortgage for a certain length of time, then you will definitely have to pay a penalty. In some cases, you will also have to pay a penalty even if you opt for an ARM because the lender is still losing money.
When you refinance a mortgage, it is good to know if there is a prepayment penalty that applies to your loan. The lender will tell you that it is an option, but in reality there is a hidden fee. If you accept the terms, you may get a rate that is 1/8 to 3/8 below the market rate. Overall, most lenders don’t have prepayment penalties. Basically you can have a prepayment penalty with a lower rate or no prepayment penalty with a higher rate; this choice is yours.
The prepayment penalty is usually triggered if the loan is paid off within five years and you have to be very sure you will not need to refinance this mortgage. If you do, then you will get hit with the prepayment penalty as well as the cost of refinancing your home. A lot of people don’t think the lower rate that you get with a prepayment loan justifies the risk that you have to take. The bottom line is it is a personal decision you will have to make, but don’t make this decision without doing some research first so that you understand what it is your getting into. Maybe you will find that a prepayment penalty loan is just what you need and can be very profitable on a loan if you only need to take it out for a short while. If it’s going to be a long- term loan, then you really need to do some thinking first.
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