Is there a penalty for paying off a mortgage early? If so, why?

Asked by Alifer, Las Vegas, NV Thu Mar 7, 2013

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Susan Gregory, Agent, Capistrano Beach, CA
Thu Mar 7, 2013
Pre-Payment penalties can be part of your Note terms, so it is important to read your NOTE and find out if there is a penalty for paying it off early. Generally, the maximum prepayment term is 5 years-but recent legislation has reduced or eliminated most prepayment penalties.
The mortgage crisis brought to light the real disadvantage to homeowners who are stuck in a bad mortgage, but also have a large prepayment penalty that effectively prevents them from refinancing into more affordable terms.
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Rena Levy, Agent, Las Vegas, NV
Sat Mar 9, 2013
Hi Alifer,

Most lenders do not charge penalty for paying off mortgage early. FHA and VA loans dose not allow Pre Payments penalty at this time. The VA or FHA home loan do not penalize for prepayment fee for paying off your VA home loan early.

There are two types of pre payments:

A soft prepayment penalty allows a borrower to sell their home at anytime without penalty, but if they choose to refinance the mortgage, they must pay the prepayment penalty.

A hard prepayment penalty, on the other hand, sticks the borrower with a penalty if they sell their home OR refinance their mortgage. Obviously this is the tougher of the two, and basically gives a borrower no option of jumping ship if they need to sell their home quickly.

Rena Levy
Certified Intentional Property Specialist
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Margaret To, Agent, Henderson, NV
Thu Mar 7, 2013
Most lenders allow early pay-off without penalty for the past few years. Always read your mortgage terms to ensure there is no penalty for pre-payment.

Keller Williams Realty, the Market Place
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Suzie Marqua…, Agent, Las Vegas, NV
Thu Mar 7, 2013
I have not seen any for a while. During the run up that created the mortgage crisis pre-payment penalties were common. There may be some out there in today's world but I pretty much think themPre-Payment penalty is a thing of the past!
Suzie Marquardt
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Mark Fleysher, Agent, Las Vegas, NV
Thu Mar 7, 2013
Every loan is different, though I haven't seen many early payoff penalties.

Why do early payoff penalties exist? In exchange for providing you with capital, the mortgage holder receives interest payments. It is in the holder's interest to get paid, so in order to issue you the loan they may require a commitment from you.

Often, you'll see this on shorter term hard money lending or other types of loans.

Also, depending on the loan you may find different contingencies, like requirements to occupy the property.

Does this help?


Mark Fleysher, 702-291-8186

Thank you.
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Terry Farnsw…, Agent, Lisle, IL
Thu Mar 7, 2013
Sometimes - however you'll want to check for this specific language in your loan documents. You typically don't see them as often anymore from my understanding. I haven't come across very many personally. Typically, if there is a penalty for paying the amount financed off early, it is only applicable for a certain period of time within the life of the loan.

Why "would" there be a penalty? Because in a perfect world, the lender wants to keep the amount financed outstanding for the life of the loan. You pay the the most interest that way, and they in turn make the most money.

I'm not in the business of giving financial advice, so this is just my personal opinion. Even if you have the money to do so, you'll want to weigh the benefits of paying off your mortgage carefully. You might be better served investing that money elsewhere, if your interest rate is super low - especially since the interest is tax deductible.

Talk to your financial professional and make sure you crunch the numbers to see if your plan makes financial sense.

Hope that helps!
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Myra Gouger, Agent, Las Vegas, NV
Thu Mar 7, 2013
Usually there is no penalty. Sometimes there is a penalty if paid off in less than 5 years. Check with your bank to see what yours might say.
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Tim Moore, Agent, Kitty Hawk, NC
Thu Mar 7, 2013
There can be, but I have not seen a penalty payoff clause in years and years.
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