The Hidden Cost of Mortgage Prepayment Options
- ricklutz4
- Mar 11
- 1 min read
Current mortgage law allows borrowers to prepay their mortgage before maturity. While this undeniably benefits those who want to move before the end of their loan term, it comes at a cost. And since everyone has this option, the cost is born by everyone, even by those who don’t want or need it.
Fannie Mae states that the prepayment option cost is a staggering 1.3%. The true impact is that if borrowers could forfeit the prepayment option, they could secure a 5.2% rate instead of the current 6.5%.
While everyone is paying for it, few borrowers prepay while others miss out.
Awareness—Many are simply unaware.
Borrowers with deteriorating credit can’t refinance, so prepayment is useless to them.
Hedge funds and secondary market investors pour vast resources into modeling prepayment risk— meaning those with financial sophistication extract the most value.
It’s time to rethink this legacy structure, educate borrowers, and make paying for prepayment ‘in the form of higher rates’ optional. Presently, artificially inflated mortgage rates unnecessarily restrict purchasing power. Lenders suffer too, as their expected cash flows are unsecured and volatile, driving an entire non-productive risk transfer industry just to hedge prepayment risk.
There are better, more efficient alternatives that allow homeowners to sell or move without unnecessary costs:
✅ Yield Maintenance ensures fair compensation for prepayments.
✅ Defeasance, under current market conditions, would allow borrowers to prepay their mortgages at over a 15% discount—unlocking liquidity and mobility without penalizing all borrowers. [If you want to discover how to get a 15% discount on your mortgage, ask Takara.]
The mortgage market needs modernization. Let’s eliminate this inefficient, hidden tax and allow better solutions to emerge.
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