Mortgage Refinance Pre-Payment Penalty

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Mortgage Refinance Loans
Understanding Prepayment Penalties and Closing Costs

The Truth in Lending Act (TILA) is a United States federal law designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement, including information about any variable rate feature, and all costs, including the annual percentage rate (APR). The APR reflects the effective yield on a loan including origination fees and discount points. All this is expressed on the truth in lending (TIL) disclosure, which is administered by the Federal Reserve.

Among the things disclosed in the TIL, is whether or not there is a prepayment penalty. With a home equity line of credit (HELOC), it will disclose key terms of the plan, including information about variable rate features, all costs and whether there is an early termination fee.

For a mortgage refinance or home equity installment loan (HEIL), you'll find the prepayment disclosure near the bottom of the form, which reads as:

[ ] may [ ] will not have to pay a penalty

Although the use of the word "may" falsely suggests that there may not be a penalty, if the box next to "may" is checked it means you WILL have a prepayment penalty. A similar disclosure about an early termination fee will be found on a HELOC truth in lending disclosure, probably also near the bottom of the form.

What are prepayment penalties and early termination fees?
According to Freddie Mac, a mortgage with a prepayment penalty option requires you to pay a penalty or fee if all or most of loan amount is repaid within a certain time period (may be a 1 year, 2 year or 3 year period of time). Prepayment penalties are usually expressed as a percentage of the outstanding balance (e.g., 1% or 2%) or as a specified number of months--typically 6 months of interest if paid off early.

A 3 year prepayment penalty common is with fixed rate mortgages. Early termination fees with home equity lines of credit are also common. Today more than 60 percent of lenders have early-termination fees vs. around 45 percent in 2000, according to HSH Associates. Early termination fees are similar to prepayment penalties in the respect that you pay a fee if you pay off and close the line within a specified period, typically three years. These fees could amount to the closing costs that the lender waived when you opened the line.


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