Q. PREPAYMENT PENALTY ON LOANS SOUNDS BAD…But could it save you money? A. According to an article in the Maui Weekly, dated January 20, 2005, Tricia Morris, President of Premiere Mortgage says this:

If you could save as much as a quarter percent on your 30-year fixed mortgage, would you do it? You would think that most consumers would answer yes. But, in fact, the opposite is true. Most consumers run from those dreaded words attached, "Prepayment Penalty."

A prepayment penalty is the sum paid to a lender if the mortgage is paid off before the terms agreed to in the loan. While the penalty may vary, generally it's six months, worth of mortgage interest. Prepayment penalties typically apply within the first three-to-five years of a mortgage loan.

Prepayment penalties can be strict or less restrictive. Strict penalties apply throughout the term of the loan...Less restrictive prepayment penalties usually are in place for six to 60 months and apply only if the property is refinanced, not if it's sold….

Now, let's go back to that quarter-percent savings on a 30-year fixed mortgage. How can that be done? Simple. Accept a less restrictive, or "soft" prepayment penalty clause with your loan. Most lenders offer loans with soft prepayment penalties with the potential savings associated, but don't promote them because of that "penalty" word.

This strategy can work for a home-buyer who is planning to stay in the home for an extended period of time and does not expect to refinance within three to five years. With interest rates unlikely to go more than marginally lower, this can be a viable strategy. However, a cash-out refinance for medical emergencies or home remodeling is also subject to the penalty.

Prepayment penalty? Don't run away from it until you check the numbers and your specific situation. Your professional mortgage broker can be a good source of advice before you make your final decision.

Premiere Mortgage has offices in Kihei and Kahana and offers a wide range of mortgage broker services to Maui's real estate professionals. Tricia Morris may be reached at 808-874-8800.
 

<< BACK TO FAQ