The Drawbacks of Prepayment Penalties
If you are in the market to buy a home, it is important that you find a loan that fits in your current budget as well as in your long-term financial outlook. For some, a long-term goal is to pay down a mortgage ahead of schedule. However, this may not be possible if your loan has a penalty for paying it off early. What are some other possible drawbacks of taking a loan with this type of clause in it?
You Will Pay the Full Interest Due on the Loan
One reason a lender won’t allow you to pay a loan off early is because that person or entity wants to maximize its profit potential. This is done by collecting as much interest on the loan as possible. The interest portion of your monthly payment is based on your current loan balance. Therefore, if your balance is lower than anticipated, the interest portion of your payment will also be lower.
You Could Sacrifice Equity When Selling the Home
Let’s say that you have $50,000 equity in a home that still has a remaining balance on it. Let’s also say that the prepayment penalty when you sell the home is $5,000. By selling the house before the mortgage is paid in full, you will sacrifice 10 percent of your equity. While a buyer may be willing to pay an extra $5,000 to close the deal, there is no guarantee that this will happen.
Most Lenders Won’t Charge an Early Payment Fee
The good news is that most lenders won’t require you to pay an early payment penalty on your mortgage. Therefore, you can pay it off however you wish as long as you make at least the required minimum payment. The best Las Vegas mortgage brokers or other lenders may talk more about these and other important clauses in a mortgage contract.