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Tuesday, June 27, 2006

Prepayment penalty

A fee that lender charges home owners if they pay more that is required on a monthly loan payment, or pay off the loan before its term ends

Loans with a prepayment penalty usually have a lower interest rate. But, in exchange for what seems a sweeter deal, you’ll be slapped with a whopping penalty of up to 3% of your loan’s amount if you decide to pay off the loan on your home, or refinance within the first 3 years of buying your home.

The penalty also applies if you pay more than 20% of your unpaid loan balance in any year during this time. So, if market rates drop in the second year of owning a home, you may miss outon an opportunity to refinance to get lower monthly loan payments.
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