Mortgage Prepayments And Penalties For Dummies

Authored By: Dennis Estrada

Regular mortgage monthly payment already covers payment on interest. Any extra or additional payment refers to prepayment. Mortgagor or borrower often asks why I have to pay penalty on prepayment or refinance. Since the mortgage companies loses payment on interest, the mortgagor or borrower needs to pay penalty. The penalty on mortgage depends on the mortgage companies.

Mortgage companies give no penalty on every prepayment for fully open mortgages, while mortgage companies give penalty on every prepayment for fully closed mortgages. As for the partially open mortgages, mortgage companies give no penalty on prepayment with limitations. The mortgagors pay penalty when they exceed limitations.

As a mortgagor, you got three common prepayment privileges. First, annual lump payment allows prepay up to 15% of the original amount of mortgage loans. Second, annual increase on the regular payment allows increase of regular payment up to 15% for the remainder of the term. Finally, double up allows to double regular payment up to the remainder of the term.

Since the mortgagor pays more on top of the regular mortgage payment, the amount of time to repay reduces significantly. For example, the mortgagor saves 2 years and months on $150,000.00 principal, 6.5% interest, 25 year mortgage, and $500.00 additional payment (one time after a year).

Dennis Estrada is a webmaster of mortgage calculators which calculate the mortgage payments, and compare different interest rates.

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