Reducing prepayment penalty

Guest 0.10 Dollars($)

I got a second mortgage a couple years ago and I almost have all of the money to pay it off. The terms of the mortgage included a prepayment penalty of 2% of the REMAINING principle balance in paid off within 3 years. I have been saving up the money to pay this off and just have it sitting in an account. If I pay down the principal using the money already saved and then pay off the loan in a couple months when I have the rest of the money, will I get away with paying a much lower prepayment penalty since the outstanding principle balance will be almost nothing?

Here is the exact language of the contract I signed:
Consecutive monthly principal and interest installments of $xxx.xx first due on the xx day of xxxxx, xxxx. Such payments to continue until
maturity when the remaining principal balance and any unpaid interest thereon shall be due and payable. In the event full prepayment is made within three (3) years of the date of the first monthly payment a prepayment penalty in the amount of two percent (2%) the remaining principal balance will be assessed.

Guest 0.10 Dollars($)

If interest on your 2nd is quite high then it is useful to pay extra on principal and then pay off the mortgage with a very low prepayment penalty. But check with your lender on whether such substantial pay down of the principal will be allowed or not.

Samantha

Hi Player,

Welcome to the forum.

As per the details in your contract, you will have to pay prepayment penalty if you repay the entire loan along with interest within 3 years of taking the loan.

If you pay down the principal first and then the rest of the balance, the prepayment penalty amount will not change. This is what I have understood from your contract.

The contract actually speaks about full repayment and this includes the principal, outstanding balance and the loan interest.

Hope this helps..

God bless you.

Samantha

Guest 0.10 Dollars($)

hanth23 · Joined: 22 Jul 2007 Posts: 23 10.95 Dollars($)

You may contact the Loan Resolution Department or the Settlement Department and request them to waive the prepayment penalty or back date the prepayment clause and provide you with a payoff quote. If you find no assistance, follow the steps mentioned below to ascertain the better option.

You stated that you acquired the mortgage two years ago, which means the prepayment penalty is going to expire in about a year’s time. Please calculate the prepayment penalty and interest you would have to pay.

Please note that prepayment penalty is calculated as follows.

=Unpaid principal balance*2/100

Please note that interest is calculated as follows.

=Unpaid principal balance*interest/100/360
Per Diem interest

Monthly interest

=Per Diem interest*the no of days in a month (30)

Further, be advised that the mortgage payment you make is first applied towards the interest payment on the loan, and any excess funds are applied towards principal payment.

Using the above formula calculate the interest that you would have to pay for a year. Compare the prepayment penalty and the interest you would pay in a year. If the prepayment penalty is lower then you may payoff the loan right now and in case the interest rate is lower, then wait and payoff your loan once the prepayment penalty expires.

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