- What is the maximum that can usually be prepaid?
- What is the minimum that must be prepaid?
- What are the cumulative and non-cumulative prepayment privileges?
- Should a prepayment follow amortization schedule?
- What about the frequency of prepayment?
- When can a mortgage be prepaid?
- If prepayment is allowed once a year; who decides the date: borrower or lender?
- When does the prepayment privilege begin?
- What is the usual penalty when prepaying open portion of the closed mortgage?
- What is the usual penalty when prepaying closed portion of closed mortgage?
Usually lenders allow borrowers at their option to prepay up to 10% or 15% annually of the original or currently outstanding balance. If it is based on original amount then it favours borrower.
It costs lenders money to process the payment so they often fix a minimum prepayment amount that must be paid in order to utilize the prepayment privilege. Depending upon the lender and amount borrowed, it can be any amount.
Prepayment privilege is usually non-cumulative which means that if borrower is allowed 10% ($10,000) of the borrowed amount ($100,000) annually, but he paid only $8000 in a year, he can not carry remaining unpaid amount to next year to add to next year’s prepayment limit of $10,000. They cannot prepay $12,000 next year.
Some lenders allow borrowers to make prepayment anytime of the year and some restrict borrowers to follow either the regular mortgage payment schedule or a particular date for prepayment. This actually could mean that even if you have all of a sudden some extra cash on hand which you want to prepay to lower your interest cost but lender might have imposed a clause that you either pay it in a particular month or along with the next mortgage payment.
Different lenders allow different number of prepayments that can be made during the year. It can range from one only a year to unlimited number of times a year provided that the maximum allowed amount rule is followed. The more prepayments a borrower can make, the better off the borrower is.
Some lenders restrict that prepayment can only be made on a particular day of the month. This means that even if the mortgage is fully open and borrower sold the house before the prepayment date, he can not pay off his loan until that prepayment date is reached which means he can lose thousands of dollars depending upon how far is the prepayment date from the date house is sold off.
If only one prepayment a year is allowed it is better that borrower decides that date. If lender controls the date, it can cost tens of thousands of dollars extra.
Prepayment privilege does not necessarily begin immediately after the money is advanced to borrower. In some cases it can begin after couple of years have elapsed. Borrower must be smart enough to make right judgment. If he thinks that he will have some extra cash shortly after he signs the contract, he should not allow this type of clause or he should get mortgage from other lender or of different terms. If I have even $5000 extra and I have to wait at least a year before I can make my prepayment then I am losing lots of money on paying interest.
Penalty is usually defined in the prepayment clause section of the loan and borrowers should fully understand these clauses before he signs the contract. Mortgage period is usually very long and borrowers may have to move away or he loses his job or some other financial difficulties may arise. It is always a good idea to consider it very carefully what if I have to break the mortgage because of unforeseen issues. If you don’t care for yourself then who will.
