why do banks charge you pre-pay penalties!

It's pretty rare to have a prepay on a mortgage but if you do it is so the lender can get a guaranteed return on their money. Most likely you have benefited over the period you've had the loan as you would have a lower rate than if you opted for no prepay. Generally only federally chartered lenders are allowed to charge prepays so you may want to make a call to the Attorney General in the state where the property is located to ensure that it can legally be charged.

The reason is simple... Risk versus Reward. If you are going to risk giving money to someone, how much money would you like to get for your trouble? The basic premise is that a pre-payment penalty compensates the lender, and allows them to make a profit significant enough for them to bother doing the loan if you pay it off too fast. Paying a loan off early REMOVES their whole reason for making the loan - collecting interest. They are actually NOT happy when you pay a loan off early, and would rather you pay the loan for the whole term.

Prepay penalties are no longer used on most home mortgages. The benefit to the lender is to guarantee a specific yield on their investment.

As stated below, most lenders do not have prepays. Some still do. The prepayment penalties for the most part came from the subprime lenders to guarantee a return on their investment as stated below. What this means is that if you pay off the loan early, the lender will make some money on it that they lost do to early payoff. Most pre pays are from 1-3 years and have a reduced penalty each year after the first year. If you have any questions please feel free to contact me. Cindy MacDonell 707-206-2832

In some situations they may be willing to waive it - but lots of good info previously. It was part of the agreement when they made the loan.

More often portfolio lenders might have a pre-payment penalty for refinancing during a set period like one year. U S Bank had one on it's conventional loans until recently...they discontinued it. They simply have a financial goal they expect to recoup on the cost to them in obtaining the loan and there is less risk in losing $$ if no one is likely to refinance too soon out of the loan. after With so many lenders not having them it becomes hard to compete when borrowers get better educated about their choices. However, more often there may be pre-payment penalties on equity lines of credit for refinancing during a set period of time. There is still a penalty of sorts for brokers and correspondent lenders with every loan that gets refinanced within 4 1/2 months...the loan officer and their lender almost always must pay back money earned! Ouch!

Pre-payment penalties are rare. They are most common in higher risk loans. And the rational behind it is that if the lender is willing to take a higher risk loan, they want to protect their ability to earn money on it.