These loans allow you to make a minimum payment, even though your actual payment is much higher. The lender will take the difference and put it on the back of your loan in the form of negative amortization. In this case, your mortgage gets bigger instead of smaller.
These penalties are contrary to our mortgage management philosophy, because they prevent you from refinancing your mortgage at will without spending thousands of dollars. Consequently, they often negate the benefits of such a transaction. Under certain conditions such as a lower guaranteed rate, it may be necessary to have a prepayment penalty.
Outline your needs and make sure that when you select a mortgage, you are addressing those needs. Don’t do something for the sake of just doing it. Be sure to outline the three or four things that you are trying to accomplish and stick with your plan. Make certain that the value is true on your mortgage. This means that your house is going to appraise for the actual value. You will get in a lot of trouble if you pulled out cash and did a lot of things based on the inaccurately appraised value of your property. Use common sense to make sure you are not getting financing based on shaky property values!
Stay away from them! There are guidelines in place that state that if you make $60,000 a year, you will qualify for a maximum loan amount. Try to stay within the guidelines. There have been loan programs in the recent past that, because you have an excellent credit rating, will allow you to state whatever you want and act like you make whatever you want, but this doesn’t mean that you can afford whatever you want. Make sure you get a mortgage that you can afford.
Just keep your eyes open and use common sense.