Understanding Mortgage Penalties

Lenders can charge penalties for both paying late and paying early.

Late payment penalty – A lender can charge you a fee for making a payment late. Fees usually cost between 4 to 5 percent of the payment owed, but some states have limits on how much they can charge. Many lenders give you a 10- to 15-day grace period before enforcing the fee—the stipulations of your late fees are spelled out in your mortgage contract—but it’s important to avoid making late payments. Delinquency on your payments can result in fees piling up to hundreds in additional costs, default fees, your credit score taking a hit, and eventually foreclosure.

Prepayment penalty – While it sounds counterintuitive, many lenders charge a fee if you make extra payments in advance of their due date or pay your loan off too soon. This could also apply to refinancing your mortgage before a certain amount of time has elapsed. They do this because when calculating the terms of the loan they could afford to offer you, they count on making a certain amount of money in interest. By paying early, you lessen the amount of interest to be paid on the loan. Usually these penalties are a percentage of your remaining mortgage (if refinancing) or a percentage of several months of interest.

While you might not think you can pay off a significant percentage of your loan early, it’s worth considering the prepayment penalty terms. If you get a much higher paying job or receive an inheritance, you could pay the loan off sooner than expected. Paying even a little extra every month significantly decreases how much interest you pay.