Prepayment Penalty In Effect After Mortgage Loan Sold

Added February 27, 2004 by Ilyce R. Glink and Samuel J. Tamkin

Print Articles

Summary: It's generally not a good idea to get a mortgage loan with a prepayment penalty because even if your loan gets sold, the penalty remains in effect. Learn how prepayment penalties are calculated by mortgage lenders. Also be aware that prepayment penalties can kick in when you sell your home at closing.

Q: If my mortgage was sold and purchased by another company is the pre-payment penalty clause in my loan still legal?

A. The short answer is yes.

But let's back up a bit. A prepayment penalty requires a homeowner to pay a fee to pay off a loan. A prepayment penalty of 1 percent on a loan of $100,000 would be $1,000. Some prepayment penalties are as high as 5 percent. If you have found a new lower interest loan or are selling your home, you would have to pay a $5,000 on a $100,000 loan if you had a 5 percent prepayment penalty.

Although some states have laws that prohibit prepayment penalties on mortgages on your primary home, other do not and in any care federally-chartered banks ignore state statutes prohibiting prepayment penalties. That's why many prepayment penalties are still floating around.

If, as many federal courts have held, state laws are not applicable to federally chartered banks or if your state does not have a prohibition on prepayment penalties, then the prepayment penalty of your loan was valid when the loan was issued, and the prepayment penalty would continue to be valid even when the loan was sold.

But it's rarely a good idea to get a loan with a prepayment penalty. What most borrowers don't understand is the penalty kicks in even if you're selling your home, not just refinancing it.

So if you have to sell and move, and you're in the penalty phase, expect to reach deep into your pocket when you get to the closing, because lenders almost never wave a prepayment penalty.

Feb. 27, 2004.

See more articles on this topic by clicking on the "RELATED ARTICLES" above and to the right.

We have over 5000 articles on Real Estate Advice, Personal Finance Advice and Consumer Advice on our site. We encourage you to look at these articles. As always, if you have a comment on our articles, don't forget to post your comment below. We thank you for coming to ThinkGlink.com.

© Ilyce R. Glink. All rights reserved. This content may not be used, distributed, syndicated, compiled or excerpted in any medium or form without written authorization from Think Glink, Inc. For information on syndicating ThinkGlink.com please contact us.

Previous article Next article