Before You Refinance - Check for Prepayment Penalties
if you are shopping for a new mortgage, try to avoid mortgages that include prepayment penalties under any circumstances.
While many loans do not include prepayment penalty stipulations, some do. In most cases prepayment penalties do not apply if you pay off a loan because you sold the property. But if you refinance a loan to get a lower interest rate or better terms, you may be required to pay up to two to three percent of the loan amount as a penalty. If your loan has a balance of $100,000, the penalty could be as high as $2,000 or $3,000.
So, what should you do? First, if you are shopping for a new mortgage, try to avoid mortgages that include prepayment penalties under any circumstances. And if you plan to refinance a mortgage, make sure you consider any prepayment penalties when you evaluate whether refinancing makes good financial sense.