You typically have the option of choosing a prepayment penalty. You will normally have better interest rates if you choose to have a prepayment penalty. However, choose carefully as you never know when you will have to or just want to refinance or sell your home. Prepayment penalties can be hefty and can be avoided.There are both "soft" and "hard" prepayment penalties. The "soft" prepay allows you to sell your home and not pay the penalty. The "hard" penalty is enforced anytime more then 20% of the balance is prepaid in a year in the first 5 years. Sometimes the length of time is less.
A prepayment penalty is generally 6 months interest.
Always ask if the rate you are quoted has a prepayment penalty. Your mortgage professional should disclose this when you are quoted a rate. At the closing table is no time to learn about a prepayment penalty.
If you are planning on staying in your home for three years or more, a prepayment penalty will help you obtain a lower rate. By agreeing to keep the mortgage for the term of the prepayment penalty, the lender will provide you with a lower rate.
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