Mean there is a penalty for paying your loan off early. Prepayment penalties are at the borrower’s option and are never mandatory requirements by the lender. Generally, prepayment penalties disappear after five years. The penalty is a percentage of the outstanding loan balance or it can be equal to a specific number of months of interest. If you want to pay 20% of your loan balance, there is no prepayment penalty for most loans. A prepayment penalty may lower your interest rate by a ¼%. There are prepayment penalty options that apply to home purchase loans and prepayment penalty options that apply to refinance loans. Typically, borrowers with good credit don’t have to worry about choosing a loan with prepayment penalties on purchase loans or refinance loans because they get more favorable interest rates to begin with because of their better credit scores and favorable payment histories.
What to Know
If you do opt for an Arizona mortgage with a prepayment penalty, try and negotiate a prepayment period for no longer than five months, the ability to make a partial prepayment up to 20% of your loan balance at any time and that the prepayment penalty only applies if you refinance your home. If you have plans on staying in your home for more than five years, a prepayment penalty may not make a difference. You should weigh all your options first before making a decision to obtain a mortgage with a prepayment penalty by comparing mortgage products without a prepayment penalty. Lenders must disclose to borrowers that their loan contains a prepayment penalty or face fines or penalties for violating lending and disclosure laws. The problem is many borrowers don’t pay attention or read their loan documents carefully and discover too late when they want to sell their home or refinance, that their Arizona mortgage contains a prepayment penalty clause.
The best way to way to avoid any surprises about your loan terms is to read them carefully first. Have your Arizona mortgage broker go over the terms with you before signing anything, or hire an attorney to review your loan documents to make sure you understand clearly what you are signing and your obligations, rights and responsibilities regarding your credit obligation.
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