No Pre-Payment Penalty
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When a loan has No Pre-Payment Penalty, that implies that you may refinance your loan at anytime without incurring a Fee. Many Lenders will add a Pre-Payment Penalty and offer a reduced rate with the assurance that you will keep the loan with them for a certain amount of time.A Pre-Payment Penalty usually comes in terms of 6 Months, or 1, 2, and 3 Years. If at anytime before your Pre-Payment Penalty period is over, you decide to refinance your loan, you will be charged a certain percentage of your loan as a Pre-Payment Penalty Fee.
If you plan on refinancing often, it is in your best interest to find a loan with No Pre-Payment Penalty.
Some states like the state of Wisconsin do not allow lenders to put a prepayment penalty on an adjustable mortgage so double check with your broker if you want a ARm and a pre pay penalty. If you intend not to refinance your mortgage then a taking a prepayment penalty can save you money with a lower interest rate, especially if you take a 3 year prepay penalty.
If you have no pre-payment penalty, not only does that mean that you will not have to pay a penalty if you refinance your home but it means that you will not have to pay a penalty if you sell your home either. A pre-payment penalty can be imposed on a borrower if you sell or refinance your home before your pre-payment penalty period has expired.
If you don't have a pre-payment penalty, consider making an extra monthly payment each year. On a traditional 30 year fixed mortgage, making an extra payment can shave off close to 9 years in the loan. That extra payment gets applied directly to your principal. Amortization tables will show you that you really dont pay down your principal until the latter half of your loan. Making an extra payment when you don't have a pre payment penalty, can dramatically increase your equity in the home.