The problem with prepayment penalties

House on mortgage

More than seven out of every 10 subprime mortgages impose prepayment penalties.

These clauses require borrowers to pay five or six months worth of interest, or a flat fee of $5,000 to $10,000, if they pay off the loan during the first several years.

Mortgage companies insisted on them as a way to guarantee a profit for investors who ultimately bought the loans.

But borrowers with good credit rarely have to put up with them -- only one in 50 conventional loans has a prepayment penalty.

They're also a burdensome cost that prevents many subprime borrowers from refinancing or selling their homes when they can't keep up with the rising payments on their adjustable-rate mortgages.

Prepayment penalties are contributing to the dramatic rise in foreclosures on subprime loans, which has the government considering whether they should be banned or at least restricted in some way.

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