Prepayment fee: A fee charged by a bank when a mortgage loan is paid ahead of schedule.
Prepayment fee: A fee that some banks charge if a homeowner pays off all or part of their mortgage early. If a homeowner has a prepayment penalty, it is usually agreed to and included in the mortgage contract.
Prepayment Fee: Avoid Penalties for Early Mortgage Payment
A prepayment fee, which is stipulated in a mortgage contract, is levied when a mortgage is paid off ahead of schedule. The penalty is based on a percentage of the outstanding mortgage balance or an amount of interest. A prepayment fee charged for the sale and refinancing of property is known as a “hard” prepayment penalty, while a prepayment penalty charged for refinancing is known as a “soft” prepayment penalty.
Usually, prepayment fees are only levied if the entire mortgage balance is discharged, or if a large portion of the mortgage is paid off all at once. Prepayment fees are not generally applied if the extra principal on the mortgage is paid off in small amounts at a time.
According to Boston attorneys John Norton and John Pulgini, “The purpose of these clauses is to compensate lenders for not obtaining interest income they anticipated, and for the possibility that the loan amount will have to be reinvested at a lower interest rate.”
The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, signed by President Barack Obama, “prohibits prepayment penalties on residential mortgage loans other than qualified mortgages, which the provision defines as residential mortgages that, among other things, do not have adjustable rates and do not result in negative amortization,” according to New York attorneys Marshall Skadden, Les Arps and John Slate.
The act also bans “a prepayment penalty provision applicable more than three years after the closing of the loan or that exceeds 2% of the prepayment.”
The prepayment rules, which went into effect on January 10, 2014, only applies to mortgages signed after to January 10, 2014.
Nowadays, most mortgages are void of any toxic features, such as negative amortization and prepayment fees, however, homeowners are advised to read the small print, or have a lawyer review the document, before signing a mortgage contract.
“Unless you hire an attorney to represent you at closing, no one else participating in the closing exclusively represents your interests. It’s important to understand that other attorneys present at the closing – for example, the lender’s or seller’s attorney – do not represent you. These people may not be able to answer your questions and are required to act in the lender’s or seller’s interests, not yours,” the Consumer Financial Protection Bureau says.