Wednesday, November 19, 2008

Should Someone Ever Pay a Pre-Payment Penalty?

Here's another question we were asked at a class we taught recently:

Q: Should a buyer ever pay a pre-payment penalty?

A: No, a buyer should never have to pay a pre-payment penalty (PPP). PPP's are added onto loans so the lender and the mortgage broker can make more money. The lender makes more because the borrower is locked into a loan that they are much less likely to refinance. The mortgage broker makes more because the lender pays the broker a rebate for adding the PPP onto the loan. Some mortgage brokers will argue that they will use the rebate they get to pay some of the borrower's closing costs, but that is rarely what actually happens to the money. Typically, the mortgage broker just keeps it for himself.

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