How to Avoid Prepayment Penalties on a Home Loan

Whether you are getting a loan or already have one, you will likely be charged a prepayment penalty if you have to pay off the loan during the first two to five years of the loan period. However, there is a way to avoid paying extra fees.

Instructions

Difficulty: Easy

If You Are in the Process of Getting a Loan

1. Ask your loan agent if the loan she has recommended for you has a prepayment penalty.
2. Ask if you can buy out the prepayment penalty. Usually, if you pay an additional point or two, the lender will allow you to buy out or buy down the prepayment penalty. (A point is 1 percent of the amount of the loan.)
3. Ask the lender if there are any other programs you qualify for that don't require a prepayment penalty.
4. Choose the loan with the shortest prepayment penalty term. Consider your future and decide how long you plan to live in your home.

If You Already Have a Loan With a Prepayment Penalty and Want to Get Out of It

5. Read your loan note. This document will tell you the exact terms and length of your prepayment period.
6. Consider your reason for wanting to get rid of your prepayment penalty. Do you want to refinance to get a lower rate? Are you moving? If you are moving, are you being transferred or is it a voluntary move?
7. Contact your current lender. If you want to refinance, consider using some negotiating tactics; they won't always work, but it can't hurt to try. Tell your lender that you have a loan that has a prepayment penalty and you would like to refinance, but don't want to get stuck with paying the penalty. Remind the lender that, since it currently holds your mortgage, you would like to give it the opportunity to keep the loan. (If it does refinance for you, make sure you get a loan without a prepayment penalty.)
8. Contact your employer if you are being transferred. Employers often offer a moving package that will pay for most or all of your moving and sale costs, and sometimes includes the payment of any prepayment penalties.