Prepayment Penalties

There are a variety of fees and stipulations that are common with mortgages and other loans, and some seem contrary to common sense.   One of these, the “prepayment penalty,” is sometimes applied in mortgage markets that are sub-prime.  Essentially, the prepayment penalty is a condition of your mortgage contract that comes into effect if you pay off your loan in its entirety.   In that situation, you would be required to pay a fee (probably relative to the size of the mortgage).  Sometimes, you will be forced to take a contract with a prepayment penalty built in, but in other circumstances, certain buyers may wish to opt for a prepayment penalty in order to obtain a lower rate.   This option is usually available only with fixed rate mortgages, and can be in your advantage.  For instance, if you are taking your FRM with the intention of paying it off over a long period of time, the prepayment penalty may save you money in the long run by providing you with a lower rate, even though at the end you’d have to pay the fee.   In that event, the prepayment penalty is usually tax deductible, but be sure to check with your lender first to make sure you have the option available.