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How to Handle Future Higher Rate-Lenders Re-take on Penalty (may be?)

handle penalty

A lender generates money from the interest incurred on the mortgage or loan. It could also be from the breakage penalties that are paid by a particular borrower. In the case that the borrower does not pre-pay the mortgage at the maturity time, then it is expected that the banks simply earn from the fees and interest fees.


However, not all homeowners with mortgages are completing their terms of paying complete fixed rates. This is due to the reasons that they downsize, or transfer their mortgage. In the case that a borrower has obtained 3 to 5 years of fixed mortgage, then there is a 50-50 chance that he may be able to prepay the mortgage.


If the mortgage is prepaid, then there is going to be a prepayment penalty to be paid by the borrowers. For a mortgage with a fixed rate, the difference lies in the interest rate. The whole idea of the difference in the interest rate is that there are lower rates in the near future. Thus, the lender will face the many losses on his or her income while they reinvest the money.


In some cases, banks are technically facing losses in the lowest rate situations. This is due to the reason that they already have sold their mortgage on other investors. They also give a fixed payment for these investors. With this promise, this is supported by the promise of a borrower. In order that lender make their promise and not incur losses, they just charge a penalty.

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