What is the effect of pre-payment penalties on a mortgage?

Pre-payment penalties are fees imposed on a borrower who pays off a mortgage loan before the end of the loan term. In Pennsylvania, the maximum pre-payment penalty allowed is 2% of the principal loan amount. The effect of pre-payment penalties on a mortgage can vary depending on the individual borrower’s situation. For borrowers who plan on making extra mortgage payments during the loan term, the additional fees of a pre-payment penalty may dissuade them from doing so. Pre-payment penalties also make it more difficult for a borrower to refinance their loan during the loan term, as the fees must be paid to the lender in order to do so. Additionally, pre-payment penalties can make it difficult to sell a home during the loan term. If the home is sold before the loan is paid off, the pre-payment penalty can be costly for the borrower. This is because the loan must be paid off in full in order for title of the property to transfer to the new owner. Overall, pre-payment penalties can be an additional source of income for lenders; however, they can also be a burden for borrowers who may wish to pay off or refinance their loan before the term of the loan is over. As such, it is important for borrowers to understand the terms and pre-payment penalties of their loan before signing the paperwork in order to avoid any surprises down the road.

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