MCP Help Blog

A recent study by the Center for Responsible Lending found that taking a loan with a prepayment penalty can be hazardous to your fiscal health. In fact, subprime borrowers with prepayment penalties were up to 20% more likely to end up in foreclosure than those who didn’t opt for one.

Does that mean you should always avoid prepayment penalties? No. Commiting to holding your mortgage for a certain period of time can get you a significantly lower interest rate. Just make sure that you can safely assume you will be in the home for at least as long as the duration of your penalty phase. And, especially important with subprime loans, make sure that the prepayment penalty phase won’t exceed the time that your rate is fixed.

Many subprime loans that went belly up were adjustable rate mortgages (ARMs). Add the risk of an ARM to the risk of a prepayment penalty and you get foreclosure. Big time. So if your penalty is in force for three years, make sure your rate won’t adjust before then.