If you’re new to mortgages, you have a lot of information to take in, and it may feel like you’re in over your head. We work with first-time home buyers all the time, and we are familiar with the confusion you may be feeling. In our experience, one of the best ways to get your bearings on this subject is to educate yourself as much as possible, and the best way to do that is to research one topic at a time so as not to get overwhelmed. In this article, we’ll be covering the topic of pre-payment privileges and penalties.
Put simply, a pre-payment penalty is a fee that’s charged if you pay off your mortgage in too short a time, whether by refinancing, selling, or prepaying. Most lenders allow their borrowers to pay 15 to 20 percent of their loan balance each year. Typical penalties are the greater of 3 months interest or Interest Rate Differential (IRD), for fixed rate mortgages. For variable rate, it’s 3 months interest. With some lenders, it’s 3% of the balance owed. These penalties exist to protect the lenders and ensure that they make money on the loan.
On the other side of the pre-payment privileges and penalties question are the privileges, which are designed to protect you, the borrower. Similarly to how the penalties ensure the lender makes money on the loan, pre-payment privileges ensure that you can pay off your loan (in whole or in part) ahead of schedule if you choose to, essentially protecting your right to not have your debt dragged out.
If you’re still unsure about these terms or are confused about the specific pre-payment privileges and penalties laid out in your mortgage, just give us a call at Centum Mortgage Store, Ltd. to learn more.