Partial Open Prepay Land Loan – What Is It?
Question: What is it and why would I choose this product?
Answer: A partial open prepay loan is a land loan product used often in a long term purchase. It has a graduated prepayment penalty usually within the first 5 years of a land loan.
Within the first year, if any payment is done beyond the expected payment amount there is a 5% prepayment fee. This 5% is only on the exceeded amount of the payment. Meaning if your payment is $10,000 annually and you pay $11,000 within the first year, the $1,000 over is charged the 5%. Ultimately, a $50.00 charge occurs and then the remaining $950.00 goes to your principal of the land loan.
A graduated prepayment penalty means that in the first year of the land loan there is a 5% penalty. Within the second year there is a 4%, third year a 3%, forth year a 2%, and fifth year a 1% penalty. Any exceeded payment or complete payoff that is done beyond five years of the loan, there is no prepayment penalty.
So why would I ever consider a land loan product like this? Lenders know that when choosing this product, you are usually committed to keeping your loan an extended amount of years. For that, partial open prepay land loans will carry a lower interest rate than a land loan that has no prepayment penalty.
What is the difference in interest rates? Typically, you will see a .25% to .50% difference in the rates. This correlates to saving $200 to $400 a year per $100,000 borrowed. Meaning a $500,000 land loan over 30 years could save you $60,000.
The choice of determining if a partial open prepayment land loan product is right for you is really determined by how long you plan to keep your loan. If you plan to keep it over 5 years, I would suggest the partial open prepay land loan product is the best option. If you intend on paying off your land loan within the first several years, than go with a land loan product with no prepayment penalties.
Kory Unruh is the Vice President of Land Loan Specialists.com and has helped clients around the nation get low long term fixed interest rates on various types of land loans. Email kunruh@landloanspecialists.com today for FREE loan approval and FREE loan advice or visit http://www.landloanspecialists.com for more expert articles. Land Loan Specialists.com is dedicated to saving you money!
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