How Do You Compute a Prepayment Fee on a Mortgage?

Mortgage holders trying to finish paying off the mortgage principal early might incur a punishment that is severe from their lender. These costs–named prepayment penalties–shield a creditor from interest earnings when a mortgage holder pays off incurred. When contemplating mortgage prepayment, minimize fee fees and compute a prepayment penalty in your mortgage to assess the fiscal situation.

Analyze your mortgage documents and see the fine print in your loan declaration regarding pre-payment. By studying the mortgage contract carefully discover the lender’s system of prepayment punishment. The financial institution may make use of a fee that is fixed based in your rate of interest to get a predetermined amount of months, or an interest rate differential system may be used by the financial institution based on the distinction between your initial rate of interest and current rates of interest as well as your principal.

Determine the precise number of your principal. Locate an amortization schedule (particulars your payment program and principal sum with each payment) in your mortgage declaration to establish this figure.

Compute your prepayment fee according to a fixed fee system by multiplying your principal by how many months by your rate of interest. As an example, in case your staying principal is $200,000, your rate of interest is 6% and the pre-determined amount of months is six, multi-ply 200,000 * 0.06 = 12,000 subsequently 12,000 / 12 = 1,000 and 1,000 * 6 = ,000 pre-payment fee.

Find your prepayment fee according to an interest rate differential system by finding the difference and establishing your rate of interest as well as the present rate of interest. As an example, in case your interest rate is 7.5% and the present rate is 5.5%, the distinction is 2 percentage-points (use 2% in the computation). Multiply your principal by the variation (200,000 * 0.02 = 4,000). Divide how many months remaining in your mortgage by 1-2 and multi-ply this by the very first amount (in the event you’ve two years remaining in your mortgage, split 24 by 1 2 to get 2). Multiply 4,000 * 2 = ,000 pre-payment fee.

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