Q: We are selling our house and our existing mortgage will be paid off out of the sales proceeds. We are concerned that our mortgage lender will charge us a prepayment penalty, and would like to know what the rules are regarding such penalty.
A: With interest rates fluctuating so rapidly, lenders want to either raise the interest rate on older mortgages or get the loan paid as quickly as possible. One would think that a lender getting rid of a mortgage with a low interest rate would be willing to accept payment in full without any prepayment penalty. But the fact remains that on many loans in the Washington area, repayment penalties still exist.
You should look at your promissory note to determine the exact terms of any prepayment penalty. The note will spell out whether such a penalty exists, and if so, the amount of that penalty.
For loans backed by the Veterans and Federal Housing administrations, there can be no repayment penalty.
In the District, for any loan carrying an interest rate of more than 8 percent, a lender can charge a prepayment penalty, but only for three years from the date of the loan. Thus, if you prepay your loan before the end of the three-year period, there is no limit on the amount of the penalty. However, if you prepay your loan after the three years, you cannot be charged a penalty.
In Maryland, there can be no prepayment penalty for loans with more than 8 percent interest.
In Virginia, the current law states that for first mortgages of under $75,000, any prepayment penalty must be limited to one percent of the amount of the loan (or none if it is a VA or FHA loan).
Read the truth-in-lending disclosure statement before you commit yourself to a particular mortgage loan. The statement must disclose the exact amount of any prepayment penalty.
You should also negotiate with your lender on the prepayment penalty, if one exists. Often, if you are selling your house -- rather than financing -- the terms of your mortgage note will indicate no prepayment penalty.
Here's a tip for future sellers: Before you put your house on the market, read your promissory note carefully, and discuss the penalty provisions with your lender. The timing of your sale may save you from paying any penalty at all.