Pre payment penalty?

Question

my husband & i is getting ready to close on our first home. we was approved for an fha 30yrs loan at 7% fixed. the cost of the home was $58.000, i ask the loan officer was there a Pre payment penalty & he said yes but only if we like hit the lotto & paid it all off in like the first 6 months & it would be like 1%. is that ok? because im going to try to pay off my home in 10 yrs & what should i look for at closing on Pre payment penalty & shady action............THX

Answer 1

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Answer 2

Don't just take the word of your loan officer on this.  I'm sure that he/she is great at what he/she does, but find out for yourself.  

The prepayment clause will be in the Promissory Note (sometime just called the Note).  The Note contains all the terms of your loan, including prepayment penalty, if there is one.  If you can't find it in your Note, then often there will be an addendum (an add-on) behind the Note that contains the pre-payment penalty, so make sure you check everything in the Note, including any addendum that is there.

If you aren't planning on paying off the loan before 10 years however, you should be fine.

Generally speaking, a prepayment penalty would only apply to VERY large amounts of money paid in advance, e.g. 20% of the loan paid in advance in a given year.  Again, this info will be found in your Note.  If you're just making an extra payment every month, you'll probably experience no blowback of any kind from your lender.  That's been my experience.

Like I said, just find out for yourself by reading the Note before you sign all of your paperwork at settlement.

Good luck to you!

Answer 3

FHA and VA loans DO NOT HAVE prepayment penalties (see below).  Also 7% for a FHA loan is high.  Are you sure this is a FHA loan or is a FHA type loan using state grant money?

Prepayment penalties are those charges which a lender imposes if you wish to pay off your loan early. Typically home mortgages are written for 15 or 30 year periods of time. While you may not hold the mortgage for the full term, it is likely that you will probably stay in the property longer than just one or two years.

For this reason, you should carefully read your note and mortgage documents, in particular the prepayment penalty clause to understand conditions which would apply to your loan. The loans which will carry a prepayment penalty often penalize you only for paying off the loan early in the first five years, and thereafter a graduating scale may apply, or there may be no prepayment penalty at all after that initial five year period.

To find out if your loan will have a prepayment penalty you should first look at the type of loan you will be acquiring. Traditional loans with fixed rates of interest usually do carry a prepayment penalty while loans with an adjustable interest rate generally do not carry the prepayment clause. There are some types of home loans which re prohibited by law from charging prepayment penalties. These loans include FHA and VA loans and federally chartered credit union loans. Prepayment penalties are illegal in some states, so you may want to check with your lender or attorney for the laws which apply for your state.

To find out if your loan will have a prepayment penalty, ask your lender when you first apply for your loan. Ask how much the prepayment penalty will be if there is to be one, and for what period of time it will apply.

Prepayment penalties can run between 2 to 4 percent of your loan amount. While you may have no intention of selling your house in the near future, and feel that a prepayment penalty would not really be an issue for you, consider the possibility of your refinancing you loan within the 2 to 5 year period of time. Interest rates may drop and you may want to refinance your loan, in which case the prepayment penalty could become an issue.

It is best to find out all the details about any prepayment penalty which may apply to your loan before you sign your loan documents. Ask questions, and if there is to be a penalty, ask if the lender would consider waiving the prepayment penalty for you. You never know when your circumstances may change and you may want to pay off or refinance your existing mortgage