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Imagine putting yourself in the borrower’s shoes and facing a 2.79% fixed rate, with three and a half years still remaining on the term. What if you were quoted a $50,000 penalty for paying the remainder of the mortgage? This seems off the charts, but unfortunately, it happens more often than people realize. Cases like this can happen every day, and this can seem extremely unfair from the borrower’s perspective.

One of the reasons that these prepayment penalties seem shielded is because it’s not clear upfront whether they exist. The lender might have it listed in the fine print, but in the process of obtaining a mortgage and all the paperwork that comes with it, details like this can get lost in the shuffle. Another reason why it might come as a surprise to the borrower is that prepayment penalties differ from one lender to another. When these penalties are not clear, it’s the borrower who ends up paying the price-quite literally. There are benefits, however, for lenders being more upfront about this information.

Confusion and Concern over Penalty Calculations

Mortgage penalties typically come across as unclear for the vast majority of consumers. Since each lender tends to treat these differently, consumers can easily get wires crossed and not be clear about what they’re responsible for if they decided to pay in advance.

Sometimes, though, this isn’t the whole story. Occasionally, a lender might go overboard with trying to take advantage of a consumer’s lack of knowledge in this arena as a result of the complex and confusing rules. This isn’t really fair to anyone, and can easily be avoided with a little more transparency.

The Client’s Voice

The fact that rules change from lender to lender is also frustrating for brokers, especially since it’s rare for clients to read their mortgage documents or fully understand them completely. Some clients who have realized only too late that prepayment penalties can be very costly argue that there should be a way to standardize these penalties so that customers are clear at the outset. Some are even calling for government intervention to make this mandatory.

What Next?

According to a recently released study, only 33 percent of homeowners even admit reading through their entire batch of mortgage paperwork. Of those who did, only 27 percent report clearly understanding all the major aspects of their home loans.

Outlining this information upfront reduces the amount of frustrated consumers who are confused over the requirements on down the road. Unfortunately, it’s not realistic to expect consumer to take a more detailed look at their documents. However, making sure that consumers are clear about the terms of their home loan has the potential to improve customer service for lenders, leading to better relationships between borrower and lender for years to come. Stating this upfront reduces confusion and aggravation, even when that information is clearly outlined in the fine print. Consider how being more transparent about this information could impact your business.