Prepayment Penalty puts Northeast Seattle Homeowner in Hot Seat

Do you have a prepayment penalty on your Home Loan?

A prepayment penalty is exactly what it sounds like. Banks make money with home loans by having you pay interest back to them over a period of time. To ensure they make a decent amount on each loan, some loans penalize you for paying them off before a specified amount of time. The amount of time can vary but is typically two or three years. The penalties can be steep and can drive your home sale decision.

An Example:

I have a client who contacted me this spring. She purchased her Maple Leaf home several years ago, but refinanced about a year and a half ago. Her loan terms specify that if she sells the home in less than two years she is subject to a prepayment penalty in the neighborhood of $6,000. As a result she is not in a position to list the home now, and will need to wait several months before she can do so. In some cases this may not matter, but in today's market, missing the prime summer months to sell your home can cost you significantly in the resale value a buyer is willing to pay.

The Solution:

When you go to take out a loan be sure to ask your lender if there is a prepayment penalty. Life changes and you never know if you will need to sell your home in the specified time period. If there is a prepayment penalty, ask if they can wave the penalty. Also be sure to ask what kind of penalty it is. Some penalties are what they call "hard" and some are "soft". Hard penalties take effect no matter what the purpose for paying off the loan. Soft prepayment penalties often allow you to avoid the penalty if you sell the home and purchase a new home.

The bottom line is know what you are signing. Ask lots of questions, and work with an agent and lender you trust who will point out the potential hazards to you.