Understanding Prepayment Penalties on Subprime Loans

Subprime mortgages can provide those with bad credit a legitimate way to purchase a house. These types of loans are also notorious for charging high interest and having prepayment penalties. Here are a few things to consider about prepayment penalties on subprime loans.

Prepayment Penalties

This type of penalty is regularly found on many different types of subprime mortgages. This is a penalty that will be incurred if you try to pay off the loan early. In many cases, it will also penalize you if you try to pay down the balance of the loan without fully paying it off.

Why They Are Used

Subprime mortgages can be very profitable for the lender that issues them. Even though they are riskier, they will be able to receive more money in interest than they would from a traditional mortgage. Many subprime lenders will package these loans and sell them to investors. As a way to guarantee the amount of interest that is paid, loan originators will include prepayment penalties in the loans. This is done so that they can secure the investment for the investors in the loans. If you have a prepayment penalty attached to your loan, you are much less likely to pay off the loan early and avoid interest charges.

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