What is the prepayment penalty
A prepayment penalty is a provision for the lender that states that there will be a penalty ensued if the borrower pays off their mortgage before a specific amount of time. The penalty would be, as in Massachusetts the amount of interest of the first year or 3 months interest whichever is less. The penalty protects lenders – who, make their money from the interest that they charge borrower – against financial loss due to a loss of expected interest revenue from a mortgage loan.
Prepayment Penalty in Massachusetts
Prepayment penalties are written into the contract that the lender makes with the borrower. It is disclosed in the documents that you will receive when getting a mortgage. If a lender has not mentioned about the prepayment penalty it would be wise to ask.
According to the Massachusetts General Laws Ch. 183, § 56,
A mortgage note that is secured by a dwelling of 4 or less separate households, is subject to a prepayment penalty corresponding to the interest of the first year, or 3 months interest whichever is less. If a refinance was made within 36 months or 3 years from the current lender to another or the house was sold within that period thus paying the mortgage loan in full, then a 3 months interest payment would also be required with the exception of loans from Federal Housing loans.
If however, the loan is paid in full after the 36 months or 3 years from the date of the note, The borrower is not required to make a prepayment fee.
Due Diligence
Prepayment penalties are not allowed on single family loans from the FHA, VA and not related to home loans but student loans. For other home loans, the lender can have a prepayment penalty that is in effect for the first 3 years of the loan and they must offer a loan that does not include a penalty.
Do your due diligence ask and figure out about the terms of your loan and specifically the prepayment penalty.
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