After 10 years of marriage, I’m still enjoying living in the first home I moved into with my husband. Buying a first home can be one of the most exciting events in a person’s life. Before making this important expenditure, people need to first sit down and determine how they will successfully finance it. After all, a home will likely be the most expensive purchase you make in your life. Talk to a loan officer and determine how much money you can reasonably borrow. Then, decide how much money you want to use as a down payment. You also must decide how many years you will finance your home for. On this blog, you will learn about the process of buying a first home with a loan.
Getting a mortgage for the first time can be a confusing process for many people, and it can be hard to understand every aspect of your loan. One aspect you might not understand involves something called a prepayment penalty. If your loan has one of these, it's very important for you to understand what this means and how it works. Here are several things you should know about prepayment penalties.
What Is A Prepayment Penalty?
If a loan has a prepayment penalty clause, it means that the borrower may have to pay a fee if he or she pays off the loan in full before the end of the loan term. In other words, if you have a 30-year loan and pay it off in 20 years, you would be subject to a fee because you paid it off early.
Are All Prepayment Penalties The Same?
There are actually two main types of prepayment penalties. The first type is called a soft prepayment penalty, and this type allows you to pay the loan off before it is due if you are paying it off from selling your home. If you are not selling your home and decide to pay off the loan, you will still have to pay the penalty if you have a soft prepayment penalty clause.
The other type is called a hard prepayment penalty clause. With this type, you will have to pay the fee if you pay off the loan early even if you are paying it off from selling the house. In other words, the only way to avoid paying this fee is to make sure you do not pay your loan off early.
If you decide to refinance your home loan in a few years, you will be subject to these fees no matter if you have a soft or hard penalty. The amount of fees you must pay will typically be calculated based on the interest amount you would have paid over the next six months.
Are There Any Benefits Of Prepayment Penalties?
There is one benefit you may receive if you choose a loan that has a prepayment penalty clause, which is a lower interest rate. Prepayment penalty clauses are beneficial for lenders, because they guarantee that borrowers will continue paying interest for a certain length of time. Because of this, a lender might be willing to drop the interest rate on a loan that has this type of clause.
If you are in the process of getting a loan and have questions about your loan, make sure you talk to your lender so you can fully understand the terms of the loan before signing the documents. Contact a mortgage company in your area to learn more about the types of mortgages available.