If you have considered home mortgage refinancing but have found out you have a pre payment penalty you may be in a bit of a catch 22 with deciding whether to pay the prepay penalty with your mortgage refinance, or wait out your prepayment period.
With mortgage interest rates being near all time low levels, many home owners consider whether they should refinance their home loan. However, if you got your mortgage over the past 5 years you may run into a situation where you have a prepayment penalty. Let's find out why.
Why Do I Have A Pre Payment Penalty?
The pre payment rider that you signed when you got your current mortgage stipulates that you will pay a prepay penalty if you refinance and pay your mortgage off early within the time period for the pre payment penalty. The prepayment option is offered to homeowners to get the homeowner the lowest interest rate possible. Many home owners sign this mortgage note rider and don't know it so if you are in this category don't feel like you are alone.
Mortgage companies use the mortgage prepayment penalty as an incentive to offer a homeowner or homebuyer a lower interest rate. In exchange for the lower rate, the homeowner agrees to not refinance with a certain period of time unless they pay a prepayment penalty.
Beware of The Greedy Loan Officer
Sometimes a loan officer will not tell you about the pre payment penalty option and just arrange it. They will do this to make a little extra money for arranging your mortgage. This is not a good business practice for the loan officer.
Often the only time you will find out about it is at the closing table, and if you are under pressure to sign your loan documetns for some reason you may elect the prepayment penalty option in order to get the mortgage when you need to get it.
If you have to change the loan paperwork at the very end it could take a day or two to fix it depending on the mortgage company - which could cost you time and money and perhaps even a home if you miss your sales closing date.
The bottom line about getting a new mortgage - make sure you get in writing before you get your mortgage that you will not have a prepayment penalty on your mortgage. You can find this kind of documentation in the paperwork a mortgage loan officer sends you up front, or from the lender in their mortgage disclosure paperwork. If you don't see anything in the paperwork that is given to you while you are going through the loan approval process then make sure you ask about a prepayment penalty.
Don't get backed into a corner.
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