Refinance
Advice
Pre-Payment
Penalty
Oftentimes
when a client gets a 2 year, 3 year, 5 year, or 7 year adjustable
mortgage, these loans will come with a prepayment penalty. This
often happens if a client's credit score is below 680 for stated
income clients and below 620 for full income documentation clients
(see stated vs. full income documentation).
Most times if you take out a 2 year adjustable mortgage the
prepayment penalty will be in effect for 2 years. 3 year adjustable
mortgage the prepayment penalty will be for 3 years. The 5 and
7 year mortgages may or may not have a prepayment penalty but
usually they will not exceed 3 years.
What is very important is to not get a 2 year adjustable loan
with a 3 year prepayment penalty. In this scenario you will
be forced to keep an adjustable mortgage for an extra year or
pay a prepayment penalty and during that 3rd year the interest
rate could adjust to a very high interest rate - one that could
be much higher than during the first two years.
Generally if you choose to refinance while the prepayment penalty
is in affect you will have to pay an extra 6 months of interest.
This type of prepayment penalty is called a soft prepayment
penalty. A hard prepayment penalty is one in which you not only
cannot refinance during the penalty period without paying the
extra fee, but you also cannot sell your home either without
paying the extra charge.
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