Even though the high-risk applicant can reduce his
prepayment penalty by switching to the other mortgage deal (lower penalty, higher interest rate), he will end up paying the higher interest rate.
On October 1, 2002, Freddie Mac no longer allowed the purchase of subprime loans with a
prepayment penalty after three years.
The intent is to eliminate the
prepayment penalty to provide an incentive for homeowners to reinvest in the production of more low-income homes for rent or to renovate existing properties.
If a borrower makes a prepayment of principal before it is due, he would have to pay a
prepayment penalty that is built into the amortization schedule.
This alternative offers you protection against rising rates with future flexibility to convert back to other financing options with a less onerous
prepayment penalty than the traditional fixed-rate loan.
To determine the attractiveness of refinancing, homeowners must weigh the prospective aftertax savings from lower interest costs against the costs of the refinancing transaction itself, including any motgage fees (points), application and appraisal fees, and other costs associated with obtaining a new mortgage, as well as any
prepayment penalty on the old mortgage.
"It was important in this transaction to maintain the
prepayment penalty and structural flexibility available through a bank balance sheet execution," said Weinberg.
In addition to the
prepayment penalty income frequently realized in conjunction with principal repayments, deferred fee income is also generally realized in conjunction with such repayments.
As part of the redemption, the company will incur a
prepayment penalty of approximately USD400,000, or USD0.05 per diluted share, in the third quarter of 2014.
According to the company, the permits to repay any new borrowings, without any
prepayment penalty, is until 31 January 2014.
The key terms of the transaction include a five-year term, an interest rate of 11% and an optional prepayment structure that allows for USD10m each year without a premium or in entirety with a
prepayment penalty.
Also, it requires a three-year phase-out of prepayment penalties for qualified mortgages and prohibits offering a loan with a
prepayment penalty without offering a loan that does not have
prepayment penalty.
Comparing options to refinance involving a
prepayment penalty, simply calculate the NPV of the existing note, using the calculator we provide online.
What was surprising to the borrower was that when he went to pay off the mortgage and refinance it to get out of the bad deal he had entered, he discovered a
prepayment penalty. In this particular case, on a $200,000 mortgage, the borrower was required not only to pay the principal, the interest due and recording fees, he was informed that he had an approximately $7,500
prepayment penalty, since he was paying off the mortgage during the first two years, or before the lower monthly payment period ended.
