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A lender generally imposes a prepayment penalty, if the borrower chooses to refinance a mortgage product. A prepayment penalty is a technique to discourage early reimbursements of mortgage. A premature payment deprives a lender of interests accrued over a long term.
A lender generally allows a borrower to prepay 20% of the loan without any fine. The penalty falls off as the mortgage matures. It might be about 3% of the outstanding balance in the first year, 2% in the succeeding year and so on. Sometimes, a lender may charge a penalty on the interest for a specific number of months. For instance, it can be 80% of the interest for six months.
A borrower may earn early repayment penalties by paying off the loan early, disposing of the home or refinancing the mortgage. A refinance is one of the most common ways to invite the prepayment fine.
Lenders make available products with prepayment penalties to borrowers. In return, borrowers may negotiate a package with low interest rates. Prime borrowers with a good payment history may make the monthly recompenses on schedule and do not need to refinance. A lender may not always impose early repayment charges on prime borrowers.
Early payment fines are mandatory for subprime borrowers. Since these individuals have poor credit scores and payment histories, lenders impose these charges to prevent refinancing. Subprime borrowers may increase their credit scores and enhance their chances to secure refinance packages with attractive interest rates. Lenders do not want to lose interest on the original mortgage products for these borrowers.
However, subprime borrowers may negotiate the terms of the prepayment charges. A borrower can confer with the lender and ask for allowances like charges for the first five years of the mortgage term or a charge not exceeding a certain percentage. Sometimes a lender may agree to waive aside the penalty for selling the property. However, most lenders do not agree to relinquish these charges for refinancing.
Some borrowers claim that their lenders imposed early payment charges without letting them know of the feature. The borrowers came to know of the costs at the time of refinancing. In fact, the documents presented at the time of closing do mention the prepayment charges. It is crucial to read the paperwork carefully before placing your signature.