A payoff penalty when used in the mortgage loan field is a contract provision that is agreed on with the lender that says that if the borrower pays off the entire loan, the American general early payoff penalty applies. The penalty will usually be expressed as a certain percentage of the amount that is outstanding during the time of payment or it may be expressed as interest of a stated number of months. This condition in the contract discourages borrowers from paying off the loan early and is also sometimes referred to as a Mortgage payment penalty.
Primarily, the American general early payoff penalty is imposed to borrowers because, from the banks point of view, the interest will be lost to them if you pay the entire amount all at ones.
How to Avoid Paying Early Payoff Penalties on Loans
Supposing you have saved up enough money to pay off the entire loan in full at some point before the time when the loan is to be fully serviced. You would want to pay off the loan and remain debt free as soon as you have accumulated enough to pay the loan off. Lets further suppose that the bank you borrowed the loan from is charging a fee of 1 per cent as a repayment penalty. You may have a balance of $10,000 on your loan, hypothetically speaking. You have accumulated this amount but with a 1 per cent penalty on early payment, you will now be liable to pay $10,100 which includes the principal balance that is outstanding, plus the 1 per cent repayment penalty that amounts to $100.
Instead of paying up the lump sum, you may break it down. Go to your banker and request to make a principle only repayment of say $9,999. This is a dollar shy of the entire loan balance. Any figure close to this an also work. You will need to the period it takes for the payment to get processed once you have paid the funds. In some banking institutions, the payment posting takes a few hours allowing it to clear.
On the day after the amount has posted, or in most cases the following day, visit your bank again and request for a calculation of your payoff. You already know that your new balance will show a very low amount. If you paid $9,999, the balance will be $1. You may need to add any unpaid interest on the dollar. The amount will still be very low. When the teller calculates for you the payoff amount, the eventual penalty will be a penny $1 penalty charge on the $1 balance on principal, therefore, no on the American general early payoff penalty paid!
Indication in the Contract
The American general early payoff penalty terms are included in the initial contract that you sign with the loan lenders. Terms may be as high as twenty per cent of the total annual loan. At times, the clause in the contract cannot be avoided and one has to accept it and sign. However, if there is a chance to negotiate this, by all means do so because there may come a time when the clause will apply and you are left with no alternative but to pay up the American general early payoff penalty.