It may be time to get rid of prepayment penalties

One of the big problems with subprime mortgages is prepayment penalties. I have talked to several people who signed up for high rate subprime mortgages think that as soon as they changed their situations (finished their divorce, improved their credit) they would pay off the high rate mortgage and get one with more reasonable rates.

Some people do this with two year “teaser” rates. They know that mortgage rate will shoot up after two years, but they figure that before that time comes their situation will be better and they can get a fixed rate mortgage at a reasonable rate.

Then they run into prepayment penalties. It is easy to overlook them when you are executing a mortgage contract (one more reason to have a lawyer whenever you do a mortgage). They can be positively punitive.

I talked to one woman who had arranged to sell her house and buy another one with a fixed rate mortgage now that her divorce was settled. Three days before close she found out that she had to pay $15,00o in prepayment penalties on a $150,000 mortgage. She had signed a mortgage with a $15,000 prepayment penalty should she payu it off anytime before five years!

This sort of lengthy penalty time is illegal in many states, including the one she was in, but the bank she had done business with was a national bank and did not have to conform to state laws.

Presidential candidate Hillary Clinton has proposed to do away with these penalties for national banks — or significantly reduce them — and I think it is a very good idea. Maasachuserstts allows limited prepayment penalties for one year for sale of house and three years on refinance. That seems reasonable to me.

For info on different mortgage terms, click here.

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