Prepayment clause

Asked by Natalie, Allentown, PA Fri Oct 9, 2009

Do all mortgages come with a pre-payment clause? and if so is it better to stay away from thoseloans?

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Matthew Tetl…, , Michigan
Fri Oct 9, 2009
No not all loans come with a prepayment clause. Every state has a limit on what can be charged as a prepayment, check with your state. I have seen many different forms of prepayment penalities ranging from 1 to 5%, 6 months of interest, etc. Lending Institutions use prepayment clauses to usually keep the loan in house to avoid losing the interest they make on the loans. FHA loans usually will not have a prepayment penality but if refinancing from a FHA loan to some other loan or maybe an FHA loan again, they do make the payoff of the 1st mortgage payable till the end of the month regardless what day you close on. Prepayment Penalities are usually a choice. Banks will usually give you a slighter lower interest rate if you have a prepayment penality, and slightly higher if you don't. I do not recommend prepayment penalities and find that rates are pretty low right now so it wouldn't be an advantage. I would reccommend staying away from them. Good luck and have a great day!
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Mike B, , Raritan, NJ
Fri Oct 9, 2009
No, and not necessarily.

Some ARM loans may have a 1 year 2% prepayment penalty, which is a moot point if you don't plan on selling your home or refinancing your loan for 1 year. I would suggest staying away from longer, prohibitive prepayment terms of 3-5 years unless you have a specific need, especially loans from finance companies. In some cases a prepayment penalty allows a lender to offer you better terms on a loan.

Traditional Fannie Mae, VA, FHA, and USDA loans do NOT have a prepayment penalty.
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