We discussed the general lack of prepayment penalties (they no longer exist) on Monday. But I also mentioned “Early Pay Off” or “EPO” fees.
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 up front 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 b/c most loans are re-sold to investors or other lenders with built in “premiums” to cover the up front fees. The EPO penalty covers the premium that covered the up front 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 up front costs.
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