Rate Jump and Pre-Payment Penalty Trap

Most lenders are fairly straightforward and honest. Others are less so. This second group will often put together subtle loans that look good, but are really traps for the unwary. One tactic is known as the rate jump and pre-payment penalty trap. With this loan, you get suckered in by a nice, low initial interest rate. The agreement is such that the rate will not increase for a period of say…2 years. Sound great, right? The trap comes in the form of a pre-payment penalty. Buried in the agreement will be a pre-payment penalty that requires you to pay a high penalty if you refinance in the first two years. Yikes! That initial rate doesn’t look so great now!