Prepayment Penalty Clause

A prepayment penalty clause is a provision in loan agreements under which the lender imposes a penalty when a borrower retires a loan before its scheduled pay off date. The purpose of these clauses is to compensate lenders for not obtaining interest income they anticipated, and for the possibility that the loan amount will have to be reinvested at a lower interest rate.

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The prepayment clause is almost always embedded as an included clause in the original mortgage contract. Thus, when the borrower signs the mortgage loan document , they must be informed if there is a penalty clause in the contract.

A "hard" prepayment penalty charges a penalty if the borrower refinances or sells their house. A "soft" penalty, on the other hand, only charges the penalty if the borrower refinances. In other words, a soft penalty gives the borrower the chance to get out of the loan by selling, whereas a hard one does not.

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Multiply the result of that average monthly interest charge by the number of months you’re charged as a condition of the prepayment penalty. The number of months is commonly about six months. So in this example, the total prepayment penalty is $2,625 (six times $437.50).

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Q: Is there a way to escape a prepayment penalty clause? A: No, the clause is there to protect the lender, or the ultimate investor if the loan was sold, which it probably was. Investors pay extra for.

The prepayment clause that will apply to you would depend on whether you. We hope that any such move (abolishing of prepayment penalty) would happen from prospective effect and not from.

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As another way to compensate for prepayment risk (which is a reinvestment risk), a prepayment penalty clause is often included in the loan contract. "Soft" prepayment terms can allow prepayment without penalty if the home is sold. "Hard" prepayment terms do not allow any exceptions without penalty.

the due-on-sale clause as imposing a form of prepayment penalty; the clause both com-pels prepayment when the real estate is sold and also requires the borrower to pay at par (i.e., the face amount of the loan balance) when in reality the loan may have a consider-ably lower market value because of increases in market interest rate.

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