Before You Refinance - Check for Prepayment Penalties
While many loans do not include prepayment penalty stipulations, some do. In most cases prepayment penalties do not apply if you pay off a loan because you sold the property, but if you refinance a loan in order to get a lower interest rate or better terms, you may be required to pay up to two to three percent of the loan amount as a penalty. If your loan has a balance of $100,000, the penalty could be as high as $2,000 or $3,000.
So what should you do? First, if you are shopping for a new mortgage, try to avoid mortgages that include prepayment penalties under any circumstances. And if you plan to refinance a mortgage, make sure you take into account any prepayment penalties when you evaluate whether refinancing makes good financial sense.