Watch Your Prepayment Penalty

\r\nAny financial analyst or advisor would recommend that, if you have a mortgage and can handle it, making extra payments to a loan’s principle amount is the best possible action to take. This is only true, however, if the terms of a mortgage allow for paying more towards principle – without repercussions. Some mortgages have prepayment penalties of up to three years; these penalties can be “hard” or “soft” as the terminology goes. By taking a prepay penalty, a borrower can reduce their rate and monthly payment, sometimes drastically. The only catch is that you have to be careful when refinancing or selling the home within the specified prepay period.\r\n

A soft prepay penalty allows a homeowner to refinance their property with no repercussions, even within the one, two or three year period. A hard prepay penalty will charge the homeowner regardless of a refinance or purchase. Also, some lenders do not allow an owner to pay more than a certain amount of principle per year (normally around 30%), without charging them fees for doing so. The key to utilizing a prepay penalty is to understand each of the options and make the best choice for specific situations.\r\n