I Would Never Take Out a Mortgage That Included This Fee

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KEY POINTS

  • I want to avoid unnecessary fees when I get a mortgage.
  • A prepayment penalty is one of those fees -- if your mortgage has one, you'll owe extra money if you decide to pay off your loan ahead of schedule.
  • A prepayment penalty could prevent you from refinancing a mortgage loan.

I have taken out several mortgage loans in my life. Each time I buy a home, I shop around carefully to find the right mortgage lender. Of course, I consider factors like the interest rate and the origination fee. But there's also something I look out for as well -- and it's a dealbreaker.

Avoid mortgages that come with this fee

When I'm shopping for a mortgage, I would never agree to take out a home loan that has a prepayment penalty.

Prepayment penalties are fees you would get stuck paying if you decided to pay off your loan ahead of schedule. They could apply if you pay off all or part of your loan early, although usually they end up applying only if you pay off the full balance early. And, in most cases, they apply when you make a large lump sum payment, but you don't get hit with them if you tack on a small extra principal payment above and beyond your minimum monthly payment.

Prepayment penalties must be disclosed upfront, and any mortgage lender that includes one of these penalties in the loan agreement is a lender I am absolutely not willing to work with.

Here's why I'd never want a home loan with a prepayment penalty

There's a simple, important reason why I would never commit to a mortgage that I could not pay off early. I don't want to be stuck with huge extra costs if I want to sell or refinance my home.

See, one of the biggest benefits of a mortgage loan is that you get a fixed guaranteed rate so your costs can't go up -- but you also have the option to refinance your loan if rates go down. This means you can make your housing costs cheaper over time if rates drop and you're able to qualify for a more affordable loan.

If you have a home loan with a prepayment penalty, you lose this big benefit. You can't just refinance your home loan to take advantage of a more favorable rate environment because if you do, you'll get stuck paying a large fee that reduces or eliminates the savings that refinancing can provide to you.

Since you'll have your home loan for a long time, why would you want to commit yourself to not being able to take advantage of any rate drops over the next 30 years?

The other big issue is that you'd get hit with this prepayment penalty if you decided to sell your home as you must pay off your home loan before you can transfer the property to a buyer. If you have an added fee to pay your mortgage lender because you have to pay a prepayment penalty, there's a greater chance you won't be able to sell your house for enough to make a profit -- or even to break even.

There are lots of mortgage lenders out there that will not charge you a prepayment penalty if you want to pay off your loan ahead of schedule. Do not take a loan from a lender that wants to limit your future options with this unnecessary fee.

Our Research Expert

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