Best mortgages with no prepayment charges (and how to avoid them)

If you are able to prepay your mortgage, it is best to ask your lender first if there are any prepayment penalty charges. Most mortgage lenders charge a prepayment penalty when borrowers pay off their loan balance before the final payment due date. Depending on the term of the loan, this penalty can vary from zero to two percent of the balance repaid. The best way to avoid prepayment penalties is to better understand how these charges are applied and whether they are legal.

You might also like: How long can a mortgage be refinanced?

What is an Early Redemption Charge (ERC)?

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A prepayment charge (also known as a “prepayment penalty”) is a fee that some mortgage lenders charge when you pay off your loan (or even part of it) before the due date.

And you might be wondering, why should I pay a penalty to pay my debt?… Well, here’s the thing: since lenders make money from the interest they charge borrowers, when you decide to repay your loan before the term of the calendar, it means less income than the lender anticipated for the initial period of your loan. So, in order to make up for the losses, they will charge you a prepayment penalty.

How are these prepayment charges calculated?

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Prepayment charges are sometimes fixed charges; however, most of the time, it is calculated based on a percentage of the final balance of your mortgage. Some companies charge different rates depending on the term of the loan, because earlier in the loan; you tend to pay less for the principal and the lender has to recover some of the lost interest. Prepayment charges vary between 0.5% and 4% of the final balance repaid.

Can you avoid prepayment charges on mortgages?

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Some loan companies charge a prepayment fee; however, they can easily be avoided by doing the following:

  • If you qualify, opt for an FHA or VA loanwhich does not allow lenders to charge prepayment fees.
  • Also, one way to avoid these unnecessary fees is to compare the prices and find a lender that does not charge prepayment fees on their loans.
  • Finally, read your mortgage agreement carefully and make sure there are no hidden clauses claiming that the lender may charge you a prepayment fee. And if, by chance, the lender you’re interested in charges an ERC, find out when and how the penalty kicks in so you stay within the parameters and avoid triggering a penalty.
    It may also be possible to negotiate with the lender to waive or reduce these fees when paying off your mortgage.

Do all mortgages have prepayment charges?

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Not all mortgage contracts come with prepayment charges. With a little research and comparison, it is possible to find mortgage lenders that do not charge this fee. Federal law prohibits prepayment penalties for certain home loans, including FHA, VA, and USDA mortgages.

Below we’ve included a top pick with some great options to choose from.

Top 8 Best Mortgage Deals With No Prepayment Fees

Not all lenders offer the same benefits, interest rates, and loan terms, so it’s always best to shop around and learn all you can about the different mortgage options available. Some of the best mortgage companies that don’t charge prepayment fees include:

Axos Bank

Axos Bank

Axos Bank offers a variety of flexible mortgage options, including FHA, VA, and home equity lines of credit. Most mortgages provided by this bank do not have prepayment penalties. When applying for a loan, speak with the loan officer and ask for loans that do not charge these penalties.

Lendingtree

Lendingtree

Lendingtree does not charge mortgage prepayment penalties; however, some lending partners may do so. Tips for avoiding paying prepayment charges through a Lendingtree lender may include negotiating with the lender to remove loan prepayment penalties and comparing all Lendingtree partner loans to find those that do not have this penalty attached to the mortgage.

Credible

Credible

Credible as a service does not impose mortgage prepayment penalties; however, certain partner financial institutions may impose these penalties. Use Credible’s assistance to find a finance company that offers single-family FHA loans, VA loans, USDA loans, or an adjustable rate loan. These loans are not subject to prepayment penalties.

Wells Fargo

Wells Fargo

Wells Fargo does not charge prepayment penalties and advises buyers to check mortgage documents with other lenders to see if there is a “prepayment penalty” or “prepayment disclosure” section.

pilings

pilings

Stilt is an online lender serving the immigrant and non-citizen community in America, providing loans to people who may have difficulty obtaining a mortgage through traditional means. Stilt does not charge prepayment penalties on its mortgages.

loan club

loan club

LendingClub offers mortgages and personal loans with no prepayment penalties. This peer-to-peer lender offers many alternatives to help buyers find the perfect mortgage for their needs. Due to the high standards of this society, those who qualify for mortgages have excellent credit.

SoFi

SoFi

SoFi is another online lender offering mortgages with no prepayment penalties; however, their loan terms are strict and most borrowers have an annual income of $100,000. This bank offers flexible terms and can find a mortgage to meet your unique needs.

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NCP Bank

NCP Bank

PNC Bank offers mortgages with no prepayment penalties for home buyers. When applying for a loan, seek approval for a loan option with no prepayment penalty.

Does ERC Worth pay?

Small house in modern design and documents with pen on white

When you have enough money to pay off your home loan, and there’s a clause including a prepayment charge, it’s time to determine if that charge is worth paying.

Paying off your mortgage early with an ERC can still be less expensive than if you had to keep paying the loan and all associated interest. Before agreeing to repay the prepayment fee, it is best to calculate whether you will save money by repaying it with the fee. If you’re not better off, it might be best to continue paying your mortgage as agreed when you set up the loan agreement.

If you’re unsure if the ERC is worth paying, it might be best to speak with your mortgage advisor to learn more about your options and the benefits of paying off the loan balance before final payment. A mortgage professional can help you determine if there are any prepayment charges associated with your loan and how much these charges will be. Additionally, hiring a mortgage lawyer can help avoid signing a mortgage contract with prepayment penalties and can help reduce those costs when you’re ready to pay off your existing mortgage.

Are prepayment penalties allowed?

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For most modern mortgages, prepayment penalty charges are not allowed; however, there are instances where these charges are still permitted. For FHA, USDA, and VA mortgages, prepayment penalties are not allowed. Additionally, it’s best to speak with a mortgage professional or attorney to determine if prepayment penalties are legal and if there are options to help you reduce or eliminate these fees when prepaying your mortgage. .

Do I need a real estate lawyer to help me get a mortgage?

young couple shaking hands with real estate agent at home

When applying for a mortgage, hiring a real estate attorney is not necessary. However, it is very beneficial to hire a lawyer to review your loan agreement and purchase agreement. Additionally, a real estate attorney can help you identify prepayment penalties in your mortgage agreement and determine if they are legal.

Although prepayment penalties are allowed, there are several restrictions. For example, a prepayment penalty can only be charged during the first three years of the loan. After three years of payments, these fees are no longer allowed. In addition, there are limits on the amount of prepayment penalties. For example, for most loans less than two years old, no more than 2% of the remaining balance is charged as part of this fee.

How to know if your loan has a prepayment penalty clause

Speak to your mortgage professional to find out more about your mortgage and whether prepayment penalties are included in the loan agreement. Your mortgage professional can help you determine if your loan agreement has prepayment penalty charges and how to avoid paying them. Ultimately, if a prepayment charge is added to your mortgage, legally there must be a clause that clearly states the charge and how the charge is calculated.

Conclusion

When considering prepaying your mortgage, it is best to check that you are not being penalized for prepaying the loan. Also, if you’re looking for a mortgage, look for one that doesn’t offer any prepayment terms. Finally, if you’re having trouble finding mortgages with no prepayment charges, do some research or contact your local mortgage broker to learn more about mortgage prepayment charges.

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