What does it mean that there is no prepayment penalty?
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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing interactive tools and financial calculators, publishing original and objective content, and allowing you to conduct research and compare information for free, so you can make financial decisions with confidence.
mortgage prepayment
Interest rates and payments automatically adjust every 6 months Interest rates and payments automatically adjust every month Minimize your monthly payments Differences Protected from rising interest rates Fixed payments Benefit from lower rates The part of the payment amount that goes toward principal versus interest will change as our prime rate changes Rate is fixed every 6 months Best of both worlds Combines the benefits of a long-term mortgage Rate adjusts every month Take advantage changes in interest rates Payment Options Accelerated Weekly Accelerated Bi-Weekly Semi-Annual Accelerated Monthly Accelerated Weekly Semi-Annual Accelerated Monthly Accelerated Weekly Semi-Annual Accelerated Monthly Accelerated Weekly Semi-Annual
An open mortgage can be partially or fully repaid at any time without paying a penalty. Because of this flexibility, open mortgage rates are often higher than closed mortgage rates. It is ideal if you are sure you can pay your mortgage in the short term.
How to avoid the mortgage prepayment penalty
The prepayment penalty is usually specified in a clause in the mortgage agreement that states that a penalty will be imposed if the borrower significantly repays the mortgage before it is due, usually within three years of committing to the loan. The penalty is sometimes based on a percentage of the remaining mortgage balance, or it can be a certain number of months of interest. Prepayment penalties protect the lender against financial loss of interest income that would otherwise have been paid over time.
Lenders include prepayment penalties in mortgage contracts to offset the risk of prepayment, especially in difficult economic times and in circumstances where the incentive for a borrower to refinance a subprime mortgage is high. These penalties do not only apply when the borrower pays the entire loan. Some penalty provisions take effect if the borrower pays a large portion of the loan balance in one payment.
Adding a prepayment penalty to a mortgage can protect against early refinancing or sale of the home in the first three years after mortgage closing, when the borrower is considered a risk to the lender. On the other hand, prepayment penalties can be added as a way to recoup some profit when a mortgage is advertised at a lower than average interest rate.
Mortgage Prepayment Penalty Calculator
The Mortgage Prepayment Calculator will help you find out if you will save more or incur more costs in the long run if you pay off your loan faster. Therefore, this calculator can also be used as a mortgage acceleration calculator.
This article explains how mortgage prepayment works, the mortgage prepayment penalty, and alternatives you can explore to pay your mortgage wisely. For example, increasing the frequency of mortgage payments, such as the biweekly mortgage payment schedule, can lead you to make 13 months of mortgage payments in a year, compared to the usual 12 months. You can calculate your prepayment penalty and learn how to reduce it or even avoid it altogether using our mortgage penalty calculator. You can look into the FHA loan and the VA loan, which have no prepayment penalty.
You can prepay your mortgage by paying a lump sum or by making small additional payments on top of your regular monthly installments. These additional payments are deducted from the principal balance, which reduces the total amount of interest the loan would have earned for the lender.
