With interest rates at record lows, you may be in the process of refinancing your existing mortgage. However, you could encounter a serious problem when you try to settle on the existing obligation. Almost all lenders charge prepayment penalty, a fee that they should have disclosed at the time you applied for the loan. Before you go ahead with the deal, you have to take this fee into account so that you fully understand the costs of refinancing your mortgage.
Lenders typically charge around six months of interest on the loan balance if you prepay during the first five years of the loan tenure. Alternatively, the penalty could be anything between 2%- 4% of the outstanding loan amount.
Go over your contract
You should have a clause in your mortgage contract, titled either ‘Prepayment Disclosure’ or ‘Prepayment Penalty Disclosure’. Pay close attention to the wordings of that clause. Typically, you will be charged more if you try to prepay within the first year. The penalty normally reduces as you approach the fourth or fifth year. If you are just about to hit that threshold, it may make sense to wait until you enter a lower penalty period.
Calculate the cost of paying the penalty on the first mortgage and compare it to the amount that you will save on refinancing with a lower rate of interest. If it works out to be beneficial in the long run, you can pay off the loan without worrying about the additional expense. But don’t forget to include a number of other costs associated with refinancing, like closing fee, appraisal fee etc.
Try negotiating with the lender. They might consider lowering the prepayment penalty, especially if they feel that you would be unable to afford the payments on your existing mortgage. The first point of contact should be the loan officer. If you don’t have any luck there, escalate it to a manager. They generally have some decision-making power on these issues. If you are able to get your prepayment penalty lowered, you might end up saving thousands of dollars in unnecessary charges.
If the primary lender disagrees to lower the fee, you can also try to negotiate with the lender from whom you are taking the refinancing loan. When you tell them that the deal would not make sense to you in the current circumstances, they might be willing to forgo some of their own charges like closing fee to ensure that the deal goes through.