Are There Prepayment Penalties on Second Mortgages?

2nd mortgages are avaliable in a wide variety of forms. Home Equity Loans and Home Equity Lines of Credit (HELOCs) are considered second mortgages. A 2nd mortgage is any loan that is secured by real property that is not in first lein position.

When you take out a second mortgage of any type you should investigate whether there are prepayment penalties on the second mortgage. Usually, if you pay off the loan before a set period of time, regardless of whether you just want to eliminate debt, sell the home, or refinance at a lower interest rate, there is some sort of penalty which may range from a few dollars into the thousands. Before agreeing to take the home equity loan or line your should be sure to understand if there is a prepayment penalty and if so, how is it calculated.

Many lenders have begun disguising the prepayment penalty on their second mortgages, calling it a "bailout fee" or using similar terminology. Basically, they say that they are not penalizing you for closing the loan early, they are simply charging you for the lenders expenses associated with the loan. Either way, if you have to pay extra to close your second mortgage early it is a prepayment penalty.