Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 12 - Prepayment Penalty Box

The majority of subprime loans, eighty percent (80%) or more, written over the years were written with prepayment penalty clauses.  In the prime lending industry, less than two percent (2%) of mortgages written were/are subject to prepayment penalties.  During my over ten years of writing prime, “A” paper, mortgages, I never once encountered a prime loan with a prepayment penalty.

These prepayment penalty clauses required borrowers who had taken out a subprime loan to pay a penalty fee of anywhere from one percent (1%) to five percent (5%) of the mortgage amount if they paid off, refinanced, their subprime mortgage early.  There were also prepayment penalty clauses written which required up to six (6) months of interest be paid to the lender if a subprime loan was paid off early.  Prepayment penalty clauses of this type were the most onerous for subprime borrowers.  On a mortgage amount of $100,000.00, at an interest rate of eight percent (8%), the prepayment penalty for early payoff would amount to almost four thousand dollars ($4,000.00).

Prepayment penalties could run anywhere from one (1) year to five (5) years on subprime loans.  Since the majority of prepayment penalty terms ran concurrently with the type of subprime loan written for borrowers; i.e. if a subprime borrower financed with a 2/28 adjustable rate mortgage (ARM), the prepayment penalty was in effect for two (2) years, if the loan was a 3/27 ARM, the prepayment penalty was in effect for three (3) years; most subprime borrowers who desired to refinance out of their current subprime ARM, prior to their payment adjusting, and payments in most cases would adjust upward, paid a prepayment penalty.

Posted by on 04/10 at 05:41 AM

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