As with any financial contract, you should read the fine print. In this case, you’ll want to find out if there is a prepayment penalty clause in your mortgage contract and how to interpret the consequences of triggering the fee. The law requires lenders to disclose prepayment penalties, along with monthly payments, fees and other loan details. As mentioned, you’ll want to read the “fine print” – in this case, the Loan Estimate or the paperwork that you’ll sign at closing – where you’ll find it mentioned prominently in the addendums and/or disclosure documents with all the other terms of your mortgage loan.Check For A Loan Prepayment Clause
It’s perfectly fine to ask your lender if they charge a prepayment penalty; if they do, ask them to show where in the paperwork you would find the details. If you already have a loan, you can look at your monthly billing statement, as it should be outlined in there.
There are some instances where prepayment penalties are illegal. These include:
- Federal Housing Administration (FHA) loans
- Department of Veterans Affairs (VA) loans
- United States Department of Agriculture (USDA) loans
- Student loans (It’s true that these loans aren’t mortgages, but it’s still good bonus info to know.)
Learn What Will And Won’t Trigger The Prepayment Fee
As we mentioned, making a few extra payments is not going to cause the prepayment penalty fee to kick in. But there are other times that you should be aware of when it will.
Penalties usually cover the first few years of a loan, because those are the riskiest for the lender. If you refinance in the early stages of your loan term, you’ll trigger the prepayment penalty. The amount of the fee will differ based on the type of penalty fee that’s included in your mortgage contract. See the above models for an example of what that could be.
As you’re reading through your Loan Estimate and contract, be aware of the type of prepayment penalty that comes with your loan, just in case something happens and you decide to refinance and/or sell. If you’re unsure, ask your mortgage lender before signing the paperwork and ask them to walk you through the math as it applies to your type of prepayment penalty, your loan amount, your amortization and your interest rate.
