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When Patricia J. Bruce decided to purchase her third home in the Rivers Edge subdivision of Fayetteville, Georgia, in July 2000, she liked what she heard from the representatives of Cendant Mortgage Company. The interest rate would be 8% (the prime rate at that time) with no prepayment penalty clause.

Many consumers aren't familiar with prepayment clauses. Not knowing, however, could cost you money. Prepayment penalties are used by lenders to attract investors to purchase the originated loan. Investors want to ensure that they will receive income from the mortgages they buy for a minimum amount of time.

"If such a clause had been in my contract, I would have exercised another option in financing," says Bruce. "I knew I would refinance because the market rate seemed to continue to go down. I refinanced 12 months later at a 6.5 % interest rate."

In exchange for a borrower accepting the prepayment penalty, an investor will often accept a lower interest rate on the mortgage. Mortgage companies will generally charge a flat fee on a loan that is paid off in two to five years. The fee can be as much as 3% of the balance of your loan if you refinance or sell the home within that time.

According to Mercy Jimenez, senior vice president of Single Family Mortgage Business for Fannie Mae (www.fanniemae.com), the nation's largest source of financing for home mortgages, Alabama, New Jersey, Texas, and Vermont have outlawed these penalties. Other states have placed restrictions on them, while others do not limit them in any way.

"If someone has good credit, [they] may be offered a much lower interest rate in exchange for the prepayment penalty. Make sure you are getting economic value," advises Jimenez.

Consumers with blemished credit histories usually pay higher interest rates but the prepayment penalty may help reduce these rates. Fannie Mae offers the Expanded Approval/Timely Payment Rewards product for these consumers. It allows lenders to offer at-risk clients a lower interest rate than they may otherwise get.

If you are considering accepting a prepayment penalty clause, make sure you know the details of your contract:

* How and when the penalty applies.

* What the cost of the penalty will be.

* That you're getting a lower interest rate in exchange for the prepayment penalty.

# posted by Medical Information : 4:08 AM