Mortgage Prepayment Penalties? They Protect The Mortgage Lender But At What Cost?

Prepayment penalties are unheard of on Fannie Mae Mortgages but are almost a given on a subprime mortgage. What are they? Prepayment penalties are fees that a subprime borrower usually has to pay if he pays off his mortgage during the first 2-3 yrs. The penalty is usually six months worth of monthly interest. On a mortgage with a monthly payment of $1,500 per month the prepayment penalty would be 6 times $1,500 or $9,000. If your payment were $2,000 per month the prepay penalty would be $12,000. Ouch. That would hurt any homeowner. And that is alot of cash to the mortgage company.

If you refinance or sell during the prepay penalty period you will have to pay that $9k directly to the bank that has your mortgage. That means that if the borrower refinanced during this prepayment period the penalty would be added into the new loan amount.

As I said A credit or Fannie Mae mortgages do not have a prepayment penalty. I wonder why subprime lenders have to collect 6 months worth of interest when A credit lenders do not. Could it be because most A credit borrowers wouldn't pay it but the subprime borrowers are so grateful to get their mortgage that they don't mind taking a chance with a prepayment penalty? Or is it just because mortgage banks and lenders were getting as much as they could out of borrowers that are down on their luck? I mean why does a subprime borrower deserve a prepayment penalty and A credit borrowers do not? Did it cost that much more for the lender to close the subprime loan?

What makes it even worse is that sometimes the prepayment penalties were put on Adjustable Rate Mortgages that had a shorter fixed term that the prepay penalties. In other words a borrower may have had a 2 yr adjustable with a 3 yr prepay. So that means that the borrower would need to refinance by the end of 2 yrs because the rate would adjust so they more or less had to refinance and pay the prepayment penalty. Subprime borrowers were more or less set up to fail with this type of mortgage.

I've had a prepayment on a mortgage. Thank God it was only a 1 year prepayment penalty. I refinanced to a much lower interest rate when the penalty was up because I during that year I was one of the few subprime borrowers that actually did something to get out of that type of mortgage. I got my credit repaired. My score went from a 565 middle score to over 700. The sad truth is most borrowers that were subprime stay subprime borrowers.

Sandra Sheely is President of First Financial Mortgage, Inc. in Sunrise, FL. She has been in the Real Estate Industry for 12 years with experience in the mortgage industry and title industry. She two Mortgage websites. http://www.ffinancialmortgage.com and http://www.lowestraterefi.com She writes a mortgage blog on her mortgage websites. She also has a credit repair website at http://firstfinancial.fixcreditbiz.com/

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