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Mortgage Prepayment Penalties, Bad Credit Situations

Think it's a good thing to pay off a loan? Well, it might be, but you could pay a penalty if you do. Penalties apply for a specific period of time, usually 1, 2, or 3 years after the loan is originated. How much is the penalty? It varies, but it could be six months of interest or 2 percent of the principal remaining on the loan — nothing to sneeze at.

Some lenders offer very low (and therefore tempting) interest rates in exchange for the borrower's agreeing to pay a penalty for early payoff. The existence of prepayment penalties is supposed to be disclosed by the lender, but it is worth asking outright if penalties apply to your loan.

Prepayment penalties are more common with non-traditional loans than conforming loans, and often they are aimed at borrowers with bad credit who will agree to them if it's the only way they can get the loan.