Pre-Pay Penalties

Prepayment Penalties:

There are two different types of prepayment penalties, hard and soft. A prepayment penalty refers to a set period of time in which you are penalized for early prepayment of your mortgage loan. If your prepayment penalty is soft, you can sell your home during this period at no penalty but you cannot refinance. If your prepayment penalty is hard, you will be required to pay the penalty in the case of sale or refinance. The penalty is usually six months of accrued interest; however this can vary depending on the loan program and terms.

The benefit of accepting prepayment penalties is usually a lower interest rate which means a lower monthly payment. In the case of a new home purchase, accepting a two year prepayment penalty if you have an attractive rate and program can make sense because it shadows capital gains law.  As with all mortgage options, this should be discussed in depth with your loan specialist.