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Hard Prepayment Penalty

Hard prepayment penalty applies to the loan throughout the specified term of the loan. If you refinance, sell the home or even make additional principal payments, you will most likely trigger a prepayment penalty.

Prepayment Penalties are generally considered to be prepaid interest, and are in many cases wholly tax deductible as a result. Please consult your tax professional for more information about how prepayment penalties and mortgage interest may affect your personal tax situation.

In contrast to a hard prepayment penalty, which is enforced if you refinance your mortgage or sell your home, a soft prepayment penalty is one that only is enforced if you refinance your home.

Always ask if the loan you are applying for has a prepayment penalty. Also, ask if a prepayment penalty option is available and what the monthly savings would be if you took a 12 or 24 month prepay penalty with your loan. If you plan on keeping the mortgage, the savings may be worth the risk of an unplanned move.

The terms of your prepayment penalty can be found in the Mortgage Note that you signed at closing. There should be a specific section that explains how long the prepayment term is, what the penalty amount is, and what is considered prepayment. Often times other than paying the loan off in full, if you pay down the balance more than 20% in any 12 month period it will be considered prepayment and you will be assessed a penalty.

As long as you plan to live in your home through the prepayment period you have nothing to worry about. If you plan on leaving before that time ask your mortgage broker if the lender will waive the pre pay in exchange for a higher interest rate.

If you have a hard prepayment penalty on your loan and you are considering refinancing your home, consult your current mortgage lender to find out if they will waive the prepayment penalty for you if you decide to refinance with them. You can also try contacting your personal mortgage professional who arranged your current loan for you to see if there is anything that they can do. If the lender or mortgage professional are unable to do anything to get the prepayment penalty waived then you should look long and hard at the numbers and decide if having to pay the prepayment penalty is worth it to still refinance. Beware of prepayment penalties that are 6 months or 12 months worth of mortgage interest. These prepayment penalties can be outrageously high and should be avoided at almost all costs.

Make sure you compare interest rates with and without a prepayment penalty. Typically accepting a prepayment penalty will give you a lower interest rate. As long as you are not planning on moving within the term of the prepayment penalty, it may be beneficial to you.

Prepayment penalties are particularly bad if you are getting a loan with one but don't know about it. Otherwise, decide if you should have a prepayment penalty or not based on how long you know you will be keeping the loan.

For more information regarding this topic, please call Mike Williams at 516-921-9000 or email