Prepayment Penalty On Mortgages
Posted on September 14, 2007
There are certain times when you come across blatantly obvious unethical tactics used by corporate America to squeeze out more profit by misleading consumers. One of the most sinister tactics of the subprime loan industry was the burying of a prepayment penalty in the mass of documents signed at a house closing. FreddieMac describes a prepayment penalty as “an option that requires you to pay a penalty or fee if all or most of loan amount is repaid within a certain time period, generally ranging from 2 to 5 years from the start of the loan.”
Anyone that has bought a house knows that a closing can be overwhelming, confusing, and always rushed. Dozens upon dozens of papers are placed in front of you to sign and even if reading each one might be possible, fully understanding the ramifications of each page is very difficult, if not impossible for the average consumer. The prepayment penalties essentially made it impossible for home owners to get out of a mortgage early without taking a huge hit financially.
Federal (Senator Dodd) and some state governments are beginning to introduce legislation to curb the predatory lending tactics to include eliminating prepayment penalties.
The NY Times recently documented examples of the trials and tribulations home owners with interest rates skyrocketing needing to sell their homes unable to get out of the mortgage.
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Prepayment penalties on anything should be a outlawed. I really can’t think of a good reason that companies can require you to be a salve to them.
I guess if they were to offer lower rates for accepting the penalty it might provide some benefit. Currently sub prime rates aren’t offering lower rates, though.