Does Texas allow prepayment penalties?
Section 302.102 of the Texas Finance Code prohibits residential mortgage lenders from implementing any kind of prepayment penalty if the borrower is occupying the purchased property as their homestead and the interest rate on the loan is higher than 12%, with a few exceptions.
On HOME LOANS prepayment penalties are not allowed in Texas. However, car loans allow prepayment penalties if the contract calls for them. If there is no prepayment penalty in the contract, then Texas Code 348.120 requires the lender to determine how much you are due for credit against interest per day.
Most states allow lenders to impose a fee if borrowers pay off mortgages before a specific date – typically in the first three years after taking out a mortgage. While Alaska, Virginia, Iowa, Maryland, New Mexico, and Vermont have banned prepayment penalties, other states allow them with certain conditions.
For many kinds of new mortgages, the lender can't charge a prepayment penalty—a charge for paying off your mortgage early. If your lender can charge a prepayment penalty, it can only do so for the first three years of your loan and the amount of the penalty is capped. These protections come thanks to federal law.
| Mortgage type | When are prepayment penalties allowed? |
|---|---|
| QMs originated on or after Jan. 10, 2014 by a federal credit union | Never |
| Adjustable-rate mortgages | Never |
| Non-qualified mortgages | Never |
| Government-backed mortgages (FHA, VA, USDA) | Never |
Usury protections in the Texas Constitution prohibit lenders from charging more than 10% interest unless the Texas Legislature specifically authorizes a higher rate.
Not all mortgages have a prepayment penalty. Typically, a prepayment penalty only applies if you pay off the entire mortgage balance – for example, because you sold your home or are refinancing your mortgage – within a specific number of years (usually three or five years).
Can you pay off a 72-month car loan early? Yes, you can pay off a 72- or 84-month auto loan early. Since these are long repayment terms, you could save considerable money by covering the interest related to a shorter period of time.
Mortgage loans with an early payment penalty are rare today, but when applicable, the fee can be steep. The penalty can be 2 percent of your loan balance within the loan's first two years and 1 percent of your loan balance in year three.
They can also choose not to charge this fee on conventional loans, so it makes sense to take out a loan from a lender that doesn't impose the penalty. Another way to avoid prepayment penalties is by holding off on refinancing or selling your home until the prepayment penalty period — usually three years — has passed.
How do I know if my loan has a prepayment penalty?
Review Your Mortgage Documents
For a standard mortgage note, the prepayment penalty clause is typically found on the first page under "Borrower's Right to Repay." If your note does not have this clause then you are in the clear and you can pay off your mortgage at any time without paying an extra fee.
Another helpful note to know about FHA loans is that there are no prepayment penalties associated with them. Thus, you can pay off your balance at any time without penalty.
A 5-4-3-2-1 prepayment penalty, otherwise known as a 5 year stepdown prepayment penalty, charges a 5% fee on the outstanding principal loan balance if the loan is paid off in year 1, a 4% fee in year 2, a 3% fee in year 3, a 2% fee in year 4, and a 1% fee in year 5.
An amount not exceeding 20 percent of the original principal amount may be prepaid in any 12-month period without penalty.
A mortgage prepayment penalty is a fee that some lenders charge when you pay all or part of your mortgage loan off early. The penalty fee is an incentive for borrowers to pay back their principal slowly over a longer term, allowing mortgage lenders to collect interest.
Prepayment penalties are less common on other types of loans, but it's possible you'll encounter them at some point. For instance, certain auto loans come with a prepayment penalty clause. Some personal loans may do as well, though many personal loan lenders specifically advertise that they don't have these fees.
Texas law limits interest rates to protect its residents from predatory lending. Under Texas law a two-year $2,000 loan is limited to 35% APR.
Similar to sharks circling in the ocean, predatory lending is ready and waiting to prey on vulnerable Texans by charging extravagant interest rates, tacking on hidden fees, and purposely pushing for applicants to borrow as much as possible.
In Texas, it is illegal for a person to operate a motor vehicle with a blood alcohol concentration (BAC) of 0.08% or higher if they are 21 years of age or older.
When they drop, debt issuers have a strong incentive to refinance their debt at lower prevailing rates. Not so with lenders. They dislike prepayments as they lose the remaining interest payments on the loan. They can also incur additional costs as they rebalance their portfolio of long and short-term loans.
What is the prepayment penalty clause?
A prepayment penalty clause is common in mortgage contracts, and it specifies that if the borrower pays down or pays off the mortgage early, usually within the first five years of the loan, a penalty will be levied.
- Refinance with a new lender. Refinancing can be an easy way to pay off your loan faster. ...
- Make biweekly payments. ...
- Round your payments to the nearest hundred. ...
- Opt out of unnecessary add-ons. ...
- Make a large additional payment. ...
- Pay each month.
Your car payment won't go down if you pay extra, but you'll pay the loan off faster. Paying extra can also save you money on interest depending on how soon you pay the loan off and how high your interest rate is.
A $30,000 auto loan balance with an average interest rate of 5.0% paid over a 6 year term will have a monthly payment of $483. In total, the loan will cost $34,787 with $4,787 in interest.
The core problem with prepayment risk is that it can stack the deck against investors. Callable bonds favor the issuer because they tend to make interest rate risk one-sided. When interest rates rise, issuers benefit from locking in low rates.
