Do You Have to Pay a Prepayment Penalty on Home Equity Loans?
When you take out a home equity loan you sign a home equity agreement that details the terms and conditions of your loan. Some lenders include provisions that allow the lender to assess prepayment penalties in the event that you pay your loan off early. However, lenders cannot assess fees that were not part of your original agreement.
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Closing Costs
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Lenders often advertise home equity loans as loans with "no closing costs." However, every loan has closing costs, and on a home equity these costs include a home appraisal, a title search, the document recording fee and applicable state taxes. Lenders often pay these fees on your behalf, but most equity loan agreements include a clause that allows you to recoup these costs if you pay the loan off within a specific period of time. If you attempt to pay off the loan, these costs are added to the principal that you owe, and the lien remains in place until these costs are paid.
Low Documentation Loans
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Some lenders provide convenience to borrowers by offering low documentation loans. Lenders speed up the underwriting process by not requiring you to produce income verification documents or bank statements that show that you can afford to make the monthly payments. However, banks that write these loans must contend with the risk that borrowers could lie about their income, and therefore rates on these loans are much higher than on other loans, and hefty prepayment penalties are almost always included in the loan agreement.
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Home Equity Lines of Credit
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Home equity lines of credit work like credit cards but are actually mortgage products. You can use a HELOC to refinance your home, pay for home renovations or even to purchase a car. However, most lenders do not require you to keep a balance on your HELOC, and you can therefore pay your HELOC down at any time without incurring a penalty. Your line remains open and you can use it in the future but if you actually ask the lender to close the line you may incur an early close-out penalty.
Considerations
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Prepayment penalties deter many people from paying off their loans early, but you should compare the penalties with the cost of paying interest on your debt for many more years. Some states have no mortgage recording taxes, which means closing costs are much lower than elsewhere. Additionally, if your lender uses an electronic appraisal as opposed to a full appraisal, it could save several hundred dollars. Depending where you live and the size of your loan, your home equity closing costs could range from a few hundred to a several thousand dollars. Check into the prepayment fees before deciding whether to proceed or not.
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