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Early Repayment Charge
Early repayment charge is the charge that the lending institution imposes on the borrower if he or she decides to payoff the loan earlier than the agreed time period. For instance, you are allowed to payoff 10% of your loan the first year, but you decides to pay it all off after the fifth month, you will be penalized with paying the additional 10% of the amount you pay off after the fifth month. Early repayment charge is also called prepayment penalty. Penalties that apply to both a home sale and a refinance are called “hard” penalties. Prepayment penalties that apply only to a refinance are called “soft” penalties.
Usually lender will forewarn the borrower of the early repayment charge. Certain loans that have the early repayment charge often entice borrowers with a lower interest rate. When the interest rates are lower, the lender experiences losses. But when the interest rates are high, the lender welcomes the early repayment and sometimes will even give compensation. If the lender offers you a low rate, they want your loyalty in return. They do not want you to refinance in the near future in case the interest rate drops again or others lender offers you a better rate. So if you change to a new lender who comes around with a better offer, you will have to pay a penalty to your old lender.
However if your loan has no prepayment penalty or early repayment charge period, then you can repay the loan in full or in part whenever you want without any penalty attached. Borrowers who have good credit usually do not have prepayment penalties, either they choose not to or they are not aware of it. In general, loan officers want to close the deal as fast as possible and may ignore the prepayment penalty option to this type of borrowers who are considered “prime” borrowers with good credit.
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