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Prepaying may reduce total interestment penalties: what they are and how to avoid them
Prepayment penalties are rare in modern residential mortgages but still exist on some commercial, subprime, or older loans. They can be triggered by refinancing, selling the home, or making large extra payments. Hard penalties apply to all early payoffs; soft penalties only to refinancing. Always check your loan documents before making large extra payments.
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04 · ideas- Prepaying may reduce total interestment penalties are rare in modern residential mortgages
- Can be triggered by refinancing, selling, or making large extra payments
- Hard penalties apply to all payoffs; soft penalties only to refinancing
- Always check your loan documents before making large extra payments
A prepayment penalty is a fee charged by some lenders when you pay off all or part of your loan ahead of schedule. It can apply when you:
- Sell the home
- Refinance to a different lender
- Make extra principal payments above a certain threshold
Prepaying may reduce total interestment penalties are designed to protect the lender's expected interest income. If you borrow at 7.5% for 30 years and pay off in year 3, the lender loses 27 years of interest they were counting on.
The good news: Most modern residential mortgages in the US do NOT have prepayment penalties. They became largely prohibited or heavily restricted by the Dodd-Frank Act (2010) for qualified mortgages. But they still appear in certain loan types.