Prepayment Penalties Can Hit First Time HomeBuyers

When you are ready to buy a home, the lender will crunch the numbers and offer you a few loan options, some of which may carry prepayment penalties. These loans may have lower interest rates because the lender is guaranteed a certain level of profit if the house if sold or refinanced.

A prepayment penalty is a fee that lender charges you, should you decide to end the contract early. The fee is a percentage of the loan balance, which usually declines over the life of the loan and often disappears by the 5th year.

It can save you big bucks in interest payments, at usually a quarter point lower than comparable mortgages without penalties.

Most lenders will only offer loans to risky borrowers if a prepayment penalty clause is accepted to lower the total risk to the lender.