Prepayment Penalty Clauses: Contract for Real Property, also known as prepayment clauses, are legal clauses included in contracts for the sale or loan of real property that require a borrower or buyer to pay an additional fee if they pay off the loan or purchase agreement earlier than the specified time. These clauses can be used to discourage buyers from taking out a loan they may not be able to repay, or to recover interest that the lender would have received if the agreement had been fulfilled. There are two main types of Prepayment Penalty Clauses: Contract for Real Property: fixed-rate and adjustable-rate clauses. Fixed-rate clauses require the borrower to pay a set sum, usually a percentage of the loan amount, if they pay off the loan before the end of the agreed term. This fee may be calculated as a percentage of the original loan amount or as a flat fee. Adjustable-rate clauses require the borrower to pay an additional fee if they pay off the loan before the end of the agreed term, and the amount of the fee varies depending on the changes in interest rates. This type of clause is usually used in mortgages to protect the lender from losses if interest rates go up during the term of the loan.
Prepayment Penalty Clauses: Contract for Real Property
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FAQ
How much are prepayment penalties? Although prepayment penalties are rare today, when applicable, the fee can be steep. The penalty can be 2 percent of your loan balance within the loan's first two years and 1 percent of your loan balance in year three.
Divide the number of months remaining in your mortgage by 12, and multiply the result by the first figure (if you have 24 months remaining on your mortgage, divide 24 by 12 to get 2). Multiply $4,000 x 2 = $8,000 prepayment penalty. When in doubt, consult with your mortgage lender.
With a 3/2/1 prepayment penalty, the homeowner is charged a 3% penalty fee on the remaining balance of the loan, if they pay off their home mortgage within the first year. If they pay off their loan balance the second year, the penalty fee is 2%.
Generally, the penalty is a straightforward declining payment schedule. For example, a 5-4-3-2-1 schedule for a 5 year loan term would make the borrower responsible for paying a penalty of 5% of the outstanding balance if prepaying the loan in the first year, 4% in the second year, 3% in the third year, and so on.
A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home. Not all mortgages have a prepayment penalty.
The penalty can be 2 percent of your loan balance within the loan's first two years and 1 percent of your loan balance in year three. For example, say you want to sell your home only one year after you took out a non-conforming mortgage loan to purchase it.
A 3-2-1 prepayment penalty, otherwise known as a 3 year stepdown prepayment penalty, charges a 3% fee on the outstanding principal loan balance if the loan is paid off in year 1, a 2% fee in year 2, and a 1% fee in year 3. If the loan is paid off in year 4, there will be no prepayment penalty.
