“I have two questions about prepayment penalties. How do they work? And how can I be sure I don’t get one?”
***ANSWER:
Good questions.
On a single-family home and 2-4 unit properties, the prepayment penalty typically applies the first one to three years after you get your loan.
The penalty is typically 80% of 6 months interest.
To avoid having a prepayment, it’s not enough to just tell your lender you don’t want one. I actually know a mortgage broker who was buying a property to fix up and quickly resell. He got a bank loan and told them he didn’t want a penalty. But when he went to resell a few months later, he had a $6,000 penalty.
How to avoid a prepayment penalty:
1. When you pre-qualify with a lender, tell them you don’t want a loan with a penalty.
2. Remind them a couple of times during the process!
3. To be 100% sure, when you sign your loan documents before closing, read the “NOTE” (aka “Trust Deed Note”, but NOT Trust Deed). Look for the paragraph that says “Prepayment Privilege” and be sure there’s no penalty.
If youre interested, I know a great lender who will be up-front with you so you dont have a penalty. Call me for his name & ph#…
