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With prepayment penalties, Freddie Mac notes on its Web site, a borrower should be given the choice of including a prepayment penalty and should never be required to do so.
The reason that is a relevant number is if those borrowers obtained a subprime loan with a prepayment penalty, they are locked into that higher rate loan for the term of the prepayment penalty, unless they want to pay the fee to refinance out of it.
Many state statutes make it difficult to determine if a prepayment penalty complies with legal restrictions.
For example, according to California's laws on predatory lending, the prepayment penalty a lender can charge is determined by the licensure of the lender and the nature of the loan.
In the event that you have to sell your home or refinance, the prepayment penalty lees will be pulled directly out of the equity in your home.
Any lower interest rate they offer you may negate any savings if you have a huge prepayment penalty and are selling your home soon.
A guaranteed interest prepayment penalty, combined with an interest reserve is fantastic racket.
If, on the other hand, you pay the loan off early, the lender keeps the money as a prepayment penalty.
Yield maintenance is similar to the guaranteed interest prepayment penalty we just discussed in the sense that both forms of prepayment penalties require the borrower to compensate the lender for a loss of a future expectation of interest payment--or yield.
The loan was for a 10-year term, a 30-amortization, a rate of 6%, and had a yield maintenance prepayment penalty.
And finally, if Treasury rates drop significantly during the term of the loan, the prepayment penalty will have to go up to compensate the lender for the loss of yield.
So in sum, the yield maintenance prepayment penalty is calculated as the greater of: 1% of the principal being prepaid; or the principal being prepaid multiplied by the present value of the difference between the remaining yield on the mortgage and the yield of a comparable Treasury security.