Is There a Penalty to Pay Off a House Mortgage Early?

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A prepayment penalty is included in many mortgages to protect the lender. Lenders include these penalties so borrowers will be discouraged from trying to refinance. Mortgage lenders and investors in these mortgages rely on the interest payments as a return on their investment. If you refinance or sell your house, they will no longer be able to earn interest on the loan. The prepayment penalty helps ensure that these loans are still profitable.

Some mortgages have prepayment penalties, but others do not include them. To determine if you have a prepayment penalty on your mortgage, refer to your loan documents. When you sign up for a mortgage, your lender is required to provide you with information about the prepayment penalty. If there is nothing included in your loan documents, you should be free to pay off the mortgage early without any issues.

Even though the basic idea of all prepayment penalties are the same, there are some different types to be aware of. Some prepayment penalties are based on a certain percentage of the value of your mortgage. For example, you may have to pay 2 percent of the value of your mortgage loan as a prepayment penalty. Some prepayment penalties are represented by a fixed dollar figure. For example, the lender might require you to pay a flat fee of $10,000 if you pay off your mortgage early.

Even though it may seem like this type of penalty clearly favors the mortgage lender, you can receive some benefits by agreeing to a mortgage with a prepayment penalty. Many lenders put prepayment penalties on the most attractive loans they have. These loans can come with low interest rates or closing costs. To offer these loans, the lenders have to include the prepayment penalties as security.

Before getting a mortgage, you should consider whether a prepayment penalty is an important issue for you or not. If you plan on being in your home for only a short time, you may want to look for a mortgage that does not have a prepayment penalty. If you plan on being in your house for an extended period, the prepayment penalty should not be a large issue. By the time you sell your house, the prepayment penalty may not apply or you would have enough equity in your home that it would not matter.