Early Pay Off Penalties (EPO)
Yesterday a borrower informed us that she intended to pay off her mortgage soon after we close because she was expecting a windfall from the sale of another property. The borrower also wants a “no points” loan. In light of this, we’d rather not close the loan at all because we will have to pay a substantial penalty.
Almost all mortgage lenders are subject to Early Pay Off or “EPO” penalties. This is because almost all mortgages are sold for a “premium.” In other words, a lender might sell a $500,000 mortgage for $510,000 to another investor soon after the mortgage closes (this is how mortgage banking works in general, and how mortgage banks make money).
The investor however will not buy that loan for a premium unless it knows it can hold the loan long enough to recoup some of the premium. So investors require mortgage banks to agree to 180-day EPO penalties. If a loan does pay off early, the mortgage bank and/or loan officer has to repay the entire premium to the investor.
Avoiding Early Pay Off Penalties (6 Months)
This is why we encourage borrowers not to refinance until 6 months after close, and it is also why will we not refinance a borrower who just closed with another lender too (we don’t want our competitors to incur the large penalties either).
We can lock in a new interest rate and refinance as soon as four months after close (with a sixty-day lock), but we can’t fund the refinance until the 180-day mark or we incur an EPO penalty.
I should add that we are also very careful not to pay off other lenders’ loans too early as well. If someone comes to us to refinance and we see that they recently closed their loan with another lender, we will either tell them to wait for the EPO period to run or to go back to the other lender.
Questions? Keep In Touch With JVM Lending
If you have questions about refinancing or early pay off penalties, contact JVM Lending. Our expert Mortgage Analysts and Client Advisors are available 7 days a week to answer questions and guide you through the homebuying process.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167