We discussed the general lack of prepayment penalties (they no longer exist) on Monday. But I also mentioned “Early Pay Off” or “EPO” fees.
What Are “Early Pay Off” Penalties?
EPO penalties are fees that originating lenders have to pay whenever a loan pays off within four to six months of funding. Borrowers are not responsible for these fees, but borrowers are encouraged not to pay off or refinance their loans right away to avoid saddling the originating lender with the fees.
Whenever a loan funds, there are substantial fees that are incurred upfront for commissions and other costs by lenders at various levels. These fees can total anywhere from $3,000 to $20,000 or more. Lenders only recoup these fees if the borrower retains the loan for an extended period.
The “origination lender” has to pay the EPO fee because most loans are re-sold to investors or other lenders with built-in “premiums” to cover the upfront fees. The EPO penalty covers the premium that covered the upfront fees (over-simplified version).
In any case, lenders do not want borrowers to refinance for six months so they can avoid large penalties or not eat significant upfront costs.
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