Riverside Realtor Blog - Alma Dizon

Alma shares her experiences and observations as a Realtor in Riverside California.

Sunday, February 26, 2006

prepayment penalties and higher prices on homes

One component of higher home prices these days are prepayment penalties that some sellers have on their loans, and the cost is being handed on down to the buyer.

Recently, I have had several clients who have had to list their homes higher than I would have recommended simply because they had prepayment penalties on their loans. The amount of the prepayment penalties (6 months interest in their cases) was high enough to make a real dent in their profits from selling their homes (and thus the down on the next house), so that they also felt that they couldn't come down much in negotiations with buyers.

Sometimes, people decide to take on a prepayment penalty because they feel that they're gaining something in return, such as a lower interest rate, or they're getting a sub-prime loan (meaning they have poor credit) and there's no other option short of buying points.

However, I have also talked with people who have excellent credit but were told that a prepayment penalty was normal. Well, it isn't necessarily, and borrowers need to ask from the start what restrictions there will be on refinancing and selling the house should their plans change.

When getting a loan to buy a home or refinancing, the borrower should get clarification of lender charges (in writing!), question unsubstantiated fees, and be willing to shop around.

Here are some useful sites on prepayment penalties:
http://www.mtgprofessor.com/A%20-%20Options/prepayment_penalty.htm
http://www.thinkglink.com/Prepayment_Penalties.htm

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