What Should I Know About Prepayment Penalties?

When you’re looking into getting a mortgage, you should also think about prepayment penalties. However, what are they in the first place? How much do they cost? What are other terms that you should be aware of before signing a contract with a mortgage lender? Having a conversation with your financial advisor and potential mortgage lenders is a step in the right direction. 

What is a prepayment penalty?

Let’s say you’ve selected a mortgage lender and you make a payment that is over the outlined additional amount. If you go over this allowed amount, then you may be charged a fee. This fee is a prepayment penalty. 

As another example, your mortgage lender may also charge you a fee if you pay off your entire mortgage before the stated end of the term. Additionally, you may be subject to a prepayment penalty if you decide to transfer your mortgage to another lender before the end of the listed term. 

Prepayment penalties can be expensive, so it’s important that you know the terms surrounding them. Make sure that you understand the details of your contract in order to not break it. This also means not being afraid to ask questions or to request clarification on your mortgage contract. 

What about prepayment privileges?

Prepayment privilege is an additional amount that you can make toward your mortgage payment. This is on top of regular mortgage payments, and you don’t have to deal with a prepayment penalty when doing this. Basically, a prepayment privilege lets you make lump-sum payments up to either a certain percentage or amount. It also lets you increase your regular payment amounts. 

It should also be noted that prepayment privileges may differ among different mortgage lenders. Therefore, make sure to look closely into the differences between them and the conditions associated with each option. 

Some of the things you can check include, for example, whether or not a mortgage lender allows you to make any prepayments in the first place when these prepayments can be made, and if there are any threshold payment amounts. Don’t forget about getting the details about any other applicable fees.

How much do prepayment penalties cost?

Getting an idea of how much a prepayment penalty can cost is a step in the right direction when it comes to planning your mortgage-related finances. The fee can be dependent on several factors and differ among different mortgage lenders. Some factors include, for example, interest rates, your prepayment amount, as well as the time left until the end of the term. 

Of course, how much a prepayment penalty can cost may also depend on the method that your mortgage lender decides to use to calculate it. The interest rate differential (IRD) calculation, for example, maybe used if you agreed to your contract less than five years ago, as well as if your mortgage’s interest rate is higher when compared to the current interest rate.