A Homeowner’s Guide to Mortgage Prepayment Penalties

When it comes to homeownership, it’s important to be knowledgeable about factors that can impact your loan and your credit. A mortgage prepayment penalty is a phrase that many homeowners hear but many don’t actually understand what it fully means. For this reason, we’re going to breakdown what mortgage prepayment penalties are and how homeowners in Cape Coral, Florida could be affected by it.

What is a Prepayment Penalty?

The idea of paying off debts early not only sounds like a good idea but is financially responsible. When it comes to mortgages though, deciding to pay your debts early may come with a penalty.

A prepayment penalty is a fee that some lenders assess if you pay off part or all of your mortgage early. It’s important to note that for homeowners who have a prepayment penalty, they would have agreed to it at closing.

With that said, a prepayment penalty doesn’t generally apply in the event you pay extra principal on your mortgage in small portions at a time.

What is the Reason for Prepayment Penalties?

Homeowners may be confused as to why they would have to pay a penalty for paying off their loans early. The reason for this is that when homeowners pay off their loan before their term period ends, the lender doesn’t receive as much interest.

Enacting a prepayment penalty at closing discourages the homeowner from paying off the loan early, which allows the lender to receive their money in interest. Similarly, by paying the penalty, the lender receives the money they lost in interest.

Prepayment Penalties and Existing Loans

Understanding whether you will receive a prepayment penalty if you pay off your loan early can be a little difficult since you would have signed for this at the closing table. However, there are steps you can take to find out the information you need.

The first thing you can do is track down your closing documents and check to see if you find any information regarding a prepayment penalty. Other places you can check include your monthly billing statements, your loan coupon book, and any documents including interest rate adjustments.

Between these few documents, you should be able to find the appropriate information. However, if you’re still unsure, you can always call your lender to ask directly. If you can, request that your lender send whether or not you have a prepayment penalty in writing for your own records.

Unfortunately, if you did sign a loan with a prepayment penalty, there’s nothing you can do about it. The best thing you can do in this case is to ensure you are knowledgeable about what would make your prepayment penalty go into effect. This would be a good time to talk to your lender and learn more details about the penalty.

Mortgage prepayment penalties can be nerve-wracking for many homeowners. However, the best approach to dealing with prepayment penalties is understanding what they are and how it can affect you in the long run.

If you’re wondering whether you have a prepayment penalty, then start by thoroughly checking your loan documents to see if you can find any information in regards to your penalty. Don’t be discouraged if you do have a prepayment penalty, taking the time to understand the triggers will ensure you don’t come out paying more money than you need to.

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Cape Coral Mortgage has been in Florida for 20 years with over 100 years of combined experience in the mortgage industry. Our team has vast experience in all phases of mortgage lending.

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