John's Florida Real Estate Blog

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The Mortgage Prepayment Penalty Predicament

I was just at a home to do a market analysis for the owners. I toured the home and made recommendations as to how they could stage the home and make cosmetic changes so that we could get the best price possible for them.

The home had been listed with another agent that I know. That agent is very good, yet the home had been shown very little during the last listing period. In all likelihood, it is the price that is the issue. In my initial estimation, the best price would be around $199,000. At that price the home would probably be shown quite a bit and would likely sell near that price. However, the owners will have to get that much just to pay off their mortgage. The closing costs will push it to about $215,000! A price that is REALLY pushing the upper levels for the current buyers market we find ourselves in.

The sellers would be able to lower their price to a more attractive level except for one fly in the ointment. A PREPAYMENT PENALTY! From what they tell me, this penalty adds $6,000 to $7,000 to their loan payoff. If they did not have this penalty, their asking price could be much lower and would likely attract more potential buyers.

Good lenders and mortgage brokers will make sure that their clients know about prepayment penalties and do their best to help them find a loan that does not have them, if possible. Penalties can be a problem in that if you pay off the loan before a specified period of time, you will be forced to pay several thousands of dollars, depending on the terms of your loan. A typical prepayment penalty will be something like 6 months worth of interest on the remaining principal of the loan. Since the penalties apply during the first few years of a loan, the principal has hardly been lowered at all, so 6 months of interest can be considerable. In a buyers market this money can determine whether you get money, break even, or lose money when you sell your home.

Why do prepayment penalties exist? If lenders have you paying a high rate of interest, they want to make sure that you do not refinance quickly to a lower rate if interest rates should drop. They want a guarantee that for a certain number of years they will get the higher rate of interest. If you stay in the home beyond the penalty period, no problem. The problem occurs when you want or are forced to sell you home sooner. Maybe you get transferred, for example. You want to sell, but right from the get-go you are thousands in the hole. If you bought your home in 2005, like my sellers today, then you have a double whammy. The market prices are stagnant or losing ground and you have the prepayment penalty. If you want to break even, you have to hope that the sale of the home will cover what you paid, your closing costs, the mortgage payoff, AND now the prepayment penalty.

So, if you are financing or refinancing your home, ask the lender or mortgage broker about whether or not there are prepayment penalties. If he cannot find you a loan without them, call some other lenders and see if you can find a more attractive loan package. If, due to your circumstances, you cannot find a no prepayment penalty loan, shop for the one that has the shortest period during which it will exist. As I said earlier, the ones I have seen were 3 year prepayment penalty periods. My sellers today said theirs was for FIVE years. That is a very long time to be "locked" into a loan. Shoot for as short a penalty period as you can.

So be aware of these penalties, shop around for financng, and ask a lot of questions. Do not wait to hear about your loan terms at the closing table when you are against the wall. This is an important investment for you. You deserve and need to understand exactly what you are getting.

If you would like to speak with a local lender in the Tampa area you can find some at my website: www.jelwell.century21bnr.com

You can also contact me via telephone from 9 AM to Midnight at: 813-783-4444 or e-mail at: jelwell1@tampabay.rr.com It will be my pleasure to assist you in any way that I can!

John Elwell - REALTOR

CENTURY 21

Bill Nye Realty, Inc.

813-783-4444

Licensed in Florida

 

Comment balloon 0 commentsJohn Elwell • July 28 2007 03:04PM
The Mortgage Prepayment Penalty Predicament
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