Most loans that required prepayment penalties were high-credit-risk subprime and Alt-A loans in the 1990s and early- to mid-2000s. Lenders designed prepayment penalties to ensure they received reimbursement from the loan in case the loan was paid off early. Prepayment penalties generally lasted from a few years after the loan closed. The amount of the prepayment penalty varies depending on the lender that demanded it. Penalties can choose the form of a flat fee or a portion of the remaining loan balance.
Read your present loan note. It will let you know that the length of the prepayment penalty and the sum. Some lenders provided declining prepayment penalties. This usually means the prepayment penalty might be 3% the first year, 2% the second year and 1 percent the next year. Most loans with prepayment penalties let some of the loan to be compensated penalty-free. Your note should also contain this information as well.
Determine where you are in the prepayment penalty cycle. If your loan provided a declining prepayment penalty, the lender will often base it on the amount of payments have been made. If your loan’s prepayment penalty drops once payment No. 13 is obtained and you have already made 12, wait 1 month and make the 13th until you pay off the loan.
Obtain your loan balance in the lender. At times the loan balance will be on your monthly mortgage coupon or on the company’s website. If you can’t find it at these places, call your lender and request that the loan balance. Do not request a loan payoff amount because the lender may charge you for this. Wait to request the official loan settlement sum till you are prepared to really pay off the loan.
Subtract in the equilibrium any volume you can pay with no penalty. Multiply the difference by the prepayment penalty. If your loan’s balance is $200,000 and the amount you can prepay without penalty is 10 percent a year, subtract 10 percent in the balance of this loan. $200,000 times 10 percent equals $20,000. The balance of $200,000 minus $20,000 equals $180,000. If your prepayment penalty is 2%, then multiply 180,000 times two percent to equal $3,600 — the prepayment penalty.