 The
pitfalls of prepayment penalties
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 Dear
Dr. Don,
I have a problem. I still have another year to go before I'm out
from under the two-year prepayment penalty on my home mortgage,
but I have a great job offer in another state that requires me to
move soon. What should I do -- sell my home and lose money, or rent
it? Is there any way to avoid paying the prepayment penalty? If
you need specific information let me know. Thank you.
-- Adam Abrogate
 Dear
Adam,
Taking out a mortgage loan that has a prepayment
penalty provision should have given you a lower mortgage rate on your loan. Trying
to find a way around it now because you have a new opportunity isn't likely to
work with your lender.
Instead, review the loan documents or talk to your
lender about the prepayment penalty to determine how much it's going
to cost you. Sometimes the prepayment penalty isn't due on a home
sale, only on a refinancing. Or your lender might be willing to
skip the penalty if you agree to fund your new home with them.
Often the terms of the prepayment penalty allow you
to pay up to 20 percent of the loan balance in a year without penalty.
The prepayment penalty is often adjusted for that provision by calculating
the penalty based on 80 percent of the outstanding balance.
You should balance the costs of renting the place
out, managing it as rental property and risking changes in interest
rates and property values while limiting your ability to buy a new
place because you're trying to wait out the penalty.
Take
a look at IRS
Publication 523, Selling Your Home, or talk to your tax professional about
the capital gains implication of selling your home when changing jobs.
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