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| Home » Types of Mortgage Loans » Prepayment Penalties |
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Prepayment Penalties |
The mortgage overview provides a general idea of the mortgage loans. Prepayment penalties are just a part of the mortgage loan system. There are varied types of mortgage loans. According to the mortgage prepayment penalties plan, it is just a provision where the borrower has a contract with the lender that considers various terms and conditions. There is a rule under the prepayment penalties which states that in the event if the loan is paid off completely, you will have to pay a penalty. Penalties are generally expressed as a percentage of the outstanding balance during the time of prepayment.
In most of the cases, the mortgage prepayment penalties disappear or decline as time passes. After the fifth year, these prepayment penalties seldom apply. Partial prepayments are allowed upto 20% of the total balance.
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These are usually allowed in a single year and without a penalty. Hard penalty is one of the terms well associated with the prepayment penalty and suggests a penalty applying to a home sale and refinancing. However if it applies only to refinancing it is termed a soft penalty.
If the prime borrowers accept a prepayment penalty they can always avail of good interest rates. The one who buy loans from the secondary market lenders have the willingness to accept a lower rate in lieu of a prepayment penalty. One of their biggest benefits is that it discourages refinancing if interest rates have a future decline. However, the prime borrowers generally avoid prepayment penalties. Prepayment penalties are demanded by the lenders on sub-prime loans because of the risk of refinancing is greater than on prime loans. The Sub-prime borrowers earn a profit from refinancing if they see an improvement in their credit rating, even if the general mortgage rates remain the same. The Prime borrowers can earn a good profit with the decline of the market interest rates.
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