Validity Of Prepayment Clause If Mortgage Is Sold

Added February 23, 2009 by Ilyce R. Glink and Samuel J. Tamkin

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Summary: A prepayment penalty requires a homeowner to pay a fee to pay off a loan. It's rarely a good idea to get a loan with a prepayment penalty. What most borrowers don't understand is that the prepayment penalty kicks in even if you're selling your home, not just refinancing it.

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 one percent on a loan of $100,000 would be one thousand dollars. Some prepayment penalties are as high as five 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 five 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.

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