Prepayment penalties can be expensive


December 19, 2004

I sold my home and will settle Dec. 22.

My $63,000 mortgage loan has a prepayment penalty. It states that I must pay six months interest on the amount prepaid in excess of 20 percent of the original loan amount.

How much money can I estimate to pay for penalty?

Some residential mortgage loans include a penalty for prepayment during the first three years. These loans usually carry interest rates that are higher than average. The prepayment penalty guarantees the lender a profitable return on the loan even if it is paid off within a short time.

Your mortgage demonstrates that a prepayment penalty can be costly. For example, if your loan interest rate is 7 percent, the prepayment penalty could amount to $1,700 or more, depending on the principal balance of your loan.

You should contact your lender and request it to provide a payoff statement. That statement will show you the amount of the prepayment penalty. You should verify that it is computed correctly, and that no penalty has been charged on 20 percent of your original loan amount.

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