Prepaying Private Mortgages
“There Can Be Several Different Options When It Comes To Prepayment Of A Private Mortgage”
First of all, when we talk about prepayment, we are talking about paying back all or part of the principle amount of a private mortgage before the end of the interest term.
This is not an unusual occurrence with private loans due to the fact that many are bridge loans and while the standard length for an interest term is one year, the use of the money may only be for a number of months.
And when the exit strategy to repay the loan develops prior to the end of the term for the mortgage, a prepayment of funds will occur.
For a mortgage to be prepaid, the mortgage needs to be an open mortgage that allows for early repayment.
If the mortgage is closed, no prepayment can occur and fill payment will be required at the end of the mortgage term unless a renewal option exists or is extended by the lender.
When a mortgage is open, there may or may not be prepayment penalties associated with early principle repayment.
This is going to be important to understand before you sign a commitment for private funding in that an open mortgage does not automatically infer that there will be no prepayment penalty.
For many private mortgages, the prepayment penalty is going to be three months interest on the amount prepaid.
But there are many different variations to prepayment penalties or costs as well.
Some mortgages will be fully open with no penalty for any amount of principal prepayment at any time during the loan term.
Other private loans will be open with no penalty after a certain number of months have passed from the start date of the mortgage, but have a penalty in place up until that point.
The actual amount of the penalty and the way its calculated can very quite a bit, but it cannot exceed the rules governing this action which typically cannot be more than three months interest on a mortgage with a term of one year.
So when you’re looking to secure a private mortgage on a piece of real estate you now own or are in the process of acquiring, try to match your prepayment options with your needs so that you can minimize your borrowing costs in the process.
At the very least, make sure you understand the prepayment options that are provided in a mortgage commitment so there are no surprises down the road.
Because private lenders are unique individuals that make their own lending decisions in many cases, you may also be able to negotiate a prepayment option that will work for you instead of just accepting whatever is provided in a loan commitment.
That being said, if time is of the essence to get funding in place, you may not have the flexibility to negotiate or seek out a superior repayment option in the time you have to work with. In those cases, make sure you at least understand what your options are and manage you cash flow accordingly if a prepayment opportunity arises.
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About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel