# Credit companies and early payments **URL:** \ **Category:** Factual Questions\ **Created:** [February 27, 2015, 2:58pm UTC](https://boards.straightdope.com/t/credit-companies-and-early-payments/713769 "2015-02-27T14:58:29Z")\ **Posts on this page:** 5\ **Page:** 2
**Author:** ![robby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/robby/32/11048_2.png) [@robby](https://boards.straightdope.com/u/robby)\ **Post date:** [March 6, 2015, 7:49pm UTC](https://boards.straightdope.com/t/credit-companies-and-early-payments/713769/21 "2015-03-06T19:49:03Z")
> [@Schnitte](#): > > Well, have you had fixed-rate mortgages, with the rate fixed over a very long time (say, ten years or more)? I have had multiple\* 30-year fixed-rate mortgages, and have never had a prepayment penalty. I don’t believe prepayment penalties are very common today in the U.S. (In fact, I know that they are prohibited for VA and FHA loans.) The only way I’d ever agree to such a penalty is if it was for a relatively short period of time (5 years or less), and if the interest rate was markedly lower than that of competing loans. \*Including refinanced loans, I have had 5 different mortgage loans at competitive interest rates (currently at 4.00% fixed-rate for a 30-year loan), none of which have had prepayment penalties. > [@Schnitte](#): > > No, it’s quite the reverse; a fixed-term mortgage without a prepayment penalty is a way for the customer to screw the bank no matter what happens. If rates go up, the customer merrily keeps paying the lower rate. If rates go down, he pays off early and refinances more cheaply. Remember that the customer is free not to pay off early if it’s not beneficial to him, whereas the bank has to accept the customer’s prepayment even if it doesn’t like to. It’s essentially like an option with a unilateral right of the customer to choose whether the loan continues at a pre-agreed rate or not, and the bank has to accept the customer’s decision no matter what. As is usual in cases of such options, the writer of the option expects compensation for this, and in the case of a fixed-rate mortgage this compensation takes the form of a prepayment penalty. All of that may be true, but the banks appear to be doing just fine, even without prepayment penalties. As I’ve stated, I’ve never encountered one. ---
**Author:** ![Ann\_Hedonia](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ann_hedonia/32/319_2.png) [@Ann\_Hedonia](https://boards.straightdope.com/u/Ann_Hedonia)\ **Post date:** [March 6, 2015, 7:58pm UTC](https://boards.straightdope.com/t/credit-companies-and-early-payments/713769/22 "2015-03-06T19:58:00Z")
Not only did my fixed rate mortgage not carry any prepayment penalties but when the interest rates fell sharply the bank that had originated the loan begin mailing, calling and even Fed-Exing me incessantly to encourage me to refinance the loan. I finally did it, partly to save money but mostly to shut them up. Kind of odd behavior if they are getting “screwed” when customers refinance. ---
**Author:** ![Doug\_K](https://avatars.discourse-cdn.com/v4/letter/d/b5ac83/32.png) [@Doug\_K](https://boards.straightdope.com/u/Doug_K)\ **Post date:** [March 6, 2015, 8:09pm UTC](https://boards.straightdope.com/t/credit-companies-and-early-payments/713769/23 "2015-03-06T20:09:03Z")
> [@Schnitte](#): > > No, it’s quite the reverse; a fixed-term mortgage without a prepayment penalty is a way for the customer to screw the bank no matter what happens. If rates go up, the customer merrily keeps paying the lower rate. If rates go down, he pays off early and refinances more cheaply. Remember that the customer is free not to pay off early if it’s not beneficial to him, whereas the bank has to accept the customer’s prepayment even if it doesn’t like to. It’s essentially like an option with a unilateral right of the customer to choose whether the loan continues at a pre-agreed rate or not, and the bank has to accept the customer’s decision no matter what. As is usual in cases of such options, the writer of the option expects compensation for this, and in the case of a fixed-rate mortgage this compensation takes the form of a prepayment penalty. > [@robby](#): > > All of that may be true, but the banks appear to be doing just fine, even without prepayment penalties. As I’ve stated, I’ve never encountered one. I’m still not buying it. There is no scenario in which the borrower “wins”. Even if they pay the loan off the same day they will still pay out more than they were lent. The best they can do is to pay less than they originally expected. And if there were really a significant risk of a loan costing the bank more than it made in interest no one would offer fixed rates without a prepayment penalty. Bankers may be a lot of things, but they aren’t idiots. But even if the bank did somehow lose money, neither side would come out ahead. ---
**Author:** ![robby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/robby/32/11048_2.png) [@robby](https://boards.straightdope.com/u/robby)\ **Post date:** [March 7, 2015, 7:06pm UTC](https://boards.straightdope.com/t/credit-companies-and-early-payments/713769/24 "2015-03-07T19:06:29Z")
One thing that hasn’t been mentioned is that many lenders often charge “points” (also known as origination fees) which are a percentage of the loan. Points are usually paid up front, but are occasionally rolled into the amount being financed (and so increase the amount being borrowed). Typical origination fees are 1.00% of the loan. Lenders also frequently charge for loan application fees (paid to the bank or credit union), not to mention various other closing costs that must be paid up front. So even if a buyer pays off a loan immediately, the lender still makes money. In the one case in which a lender waived the closing costs (on an equity loan), I had to agree to keep the loan for at least two years, or pay the closing costs retroactively if the loan were paid off sooner. ---
**Author:** ![kayaker](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kayaker/32/441_2.png) [@kayaker](https://boards.straightdope.com/u/kayaker)\ **Post date:** [March 7, 2015, 7:26pm UTC](https://boards.straightdope.com/t/credit-companies-and-early-payments/713769/25 "2015-03-07T19:26:49Z")
> [@Doug\_K](#): > > I’m still not buying it. There is no scenario in which the borrower “wins”. Even if they pay the loan off the same day they will still pay out more than they were lent. The best they can do is to pay less than they originally expected. I purchased my business from my former partner through a 15 year loan that we wrote up between us. I worked hard to pay it off as quickly as possible, sending a final large payment 3.75 years into the loan. My ex partner had structured some of his tax stuff without anticipating my early payoff, which caused him a huge tax problem. When he realized what was happening he asked me to slow down my repayment, which I declined to do. He even threatened a lawsuit. I don’t know all the specifics, and I am not an economics person, but hey. [Previous page](https://boards.straightdope.com/t/credit-companies-and-early-payments/713769.md?page=1)