When talking about interest rates, there are a couple of things you should know. Clauses can be inserted into mortgages that really only have impact in times when it is anticipated that interest rates will be changing. Often, these clauses are not inserted at all, but depend on your anticipated circumstance and market conditions when you want to sell your home (or, in some cases, buy a home).
An assumable loan is one that can be taken over by a buyer of the mortgaged property. In a market where interest rates are going up, it can be a major factor in a sale.
Example: You have a mortgage against your property with an interest rate of 6%. When you decide to sell your home, interest rates are 8%. If a buyer can assume your 6% loan instead of getting a new loan at 8%, your property becomes more desirable. You may even be able to get a higher price and still save the buyer some money.
Lenders are, of course, aware of the loss they will take if a buyer assumes the low-interest loan rather than getting a new, higherinterest loan. To prevent this, they rarely offer a fixed rate loan that is assumable. They instead restrict assumable loans to those mortgages that call for the interest rate to adjust to market rates.
The prepayment penalty is used most effectively in a falling interest rate market. If your mortgage is 8% and rates when you decide to sell are 6%, your buyer is not going to want to assume your loan. Lenders know that having 8% loans replaced by 6% loans is not as profitable as continuing the 8% loans, and so they charge a prepayment penalty.
Simply put, a prepayment penalty means that if you pay off or pay down your loan too soon, you pay a penalty. Since there is generally a surge of refinancing as interest rates fall, the lender makes up some of the loss that is incurred by replacing high-interest loans with lower-interest loans.
There is no standard prepayment penalty for all loans. The most common prepayment penalty clauses are reviewed with specific loans. When you apply for a loan, always ask if there is a prepayment penalty.
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04292010
1. People in the USA are living on the edge and do not even realize it
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