There may come a time in your life when you have the finances available to pay more off your home loan then you originally intended, or you may find a more affordable home loan and want to re-finance. But what happens if you decide to do this and will it really be beneficial financially?
When you first apply for home loan is when you really need to be asking yourself this question. Once you have signed a contract you are tied into any of the included clauses, including anything relating to penalties for early payment. You will be able to tell if you are liable for pre-payment penalties from the Truth in Lending Disclosure form your lender will complete.
Why are penalties imposed?
When you apply for a home loan you should be given the option of having early payment penalties in place or not. Sometimes opting to have penalties on your home loan agreements can seem like a good idea as you may receive a lower interest rate, or lower closure fees.
But you need to make sure that you fully understand how much the fees may cost if you decide to pay off the loan early, re-finance, or even sell your home. Penalty clauses in home loan contracts can vary; you may have to pay only if payment is made within the first five years, or you may not have to pay if you are selling your home, for instance.
Are penalties always bad?
If you want to re-finance and it looks like it’s going to cost you a fortune you may think that penalties are a bad thing. It has to be said that home loan penalty clauses are there primarily to benefit the lender. They are a way of attracting business by offering appealing benefits, such as reduced interest rates, whilst at the same time assuring a certain level of income for the lender should the customer opt to take advantage of the benefits but then decide to repay early.
That doesn’t necessarily mean that having penalties on your home loan contract is always bad; you may decide that any fees you risk paying are worth it to get benefits when you first take out the loan.
I have penalties in place for early payment, what should I do?
The first thing you need to do if you want to pay early, or re-finance on a home loan, is to check exactly what the penalties will be. You can then try and negotiate with the lender to see if they are willing to reduce the penalties. Remember that you are trying to get something from them that they are not obliged to give so it is always a good idea to be polite.
If you are not able to get any reduction on the penalties payable it is then up to you. What is going to be more beneficial to you in the long run, paying off or re-financing and paying the penalties, or deciding to stick with your regular home loan payments?