• Be careful of penalties if you pay off mortgages early.mortgage image by hans slegers from Fotolia.com
  
  Perhaps you have received an inheritance, hit the lottery or otherwise have come into enough money that would allow you to pay off your mortgage because it is about the largest payment you make every month. Before you do it, however, read your mortgage papers carefully because your lender may charge you a lot of money if you pay the loan off early. It's possible that this prepayment penalty will cause you to rethink whether the time is right to pay it off.
  
  

Mortgage Prepayment Penalty Defined

• According to The Mortgage Professor's website, if you pay off your mortgage within about five years of your signing it, your mortgage may contain a provision that you will pay a penalty to the lender. Usually, prepayment penalties will be less the longer you wait to pay off your mortgage. There are two types of prepayment penalties, so-called "hard" and "soft" penalties. A prepayment is considered hard if you sell your home or refinance your mortgage, whereas it is considered soft if it only is imposed if your refinance it.
  
  

Reasons for a Prepayment Penalty

• Possibly the lender will sell your mortgage to another company and it is worth more if it has a prepayment penalty attached to it. Then again, your lender may offer you a lower rate if he is able to have the note contain a prepayment provision. If your credit rating is such that your mortgage will be considered below prime grade, the lender may insist that your mortgage note contain a prepayment penalty because of the increased risk he is about to assume.
  
  

Possible Solution

• Many prepayment provisions in mortgage loans are not invoked if you pay off up to 20 percent of your mortgage. The specific language in your mortgage will indicate if you can only do that once, or a number of times, without penalty. If you can only do it once, do so because your lender's early payoff penalty is probably too large to make it worthwhile. On the other hand, if you can reduce your mortgage by 20 percent a number of times during the prepayment period, do so without sustaining the penalty.
  
  

Waiver

• You can go to your mortgage lender with the hope of his waiving the pre-payment penalty but it is rare that he will issue one. Unfortunately, if you are moving your loan to another lender because of more favorable terms, or you are selling your home, your current lender is under no obligation to accede to your request. However, if you are refinancing with the same company, you'll have a much better chance of having the penalty waived.