Pre-payment Penalty to Refinance
Question: We refinanced the original loan on our Prescott home to get some extra cash. The documents we signed for the original loan required a 10% pre-payment penalty if we paid off the original loan early. The original loan was $180,000, so when we refinanced we paid the $18,000 pre-payment penalty. Did we have to pay this $18,000 pre-payment penalty under the Dodd-Frank Act? Our accountant said that the Dodd-Frank Act does not prohibit pre payment penalties, but that we are entitled to an income tax deduction for this $18,000 pre-payment penalty. Is our accountant right?
Answer: Yes. The amount of any pre-payment penalty is established in the loan documents between a borrower and a lender. Pre-payment penalties are not prohibited by the Dodd-Frank Act. Most lenders will enforce a pre-payment penalty if a borrower refinances the loan with a different lender. This $18,000 pre-payment penalty, however, should be tax-deductible under the mortgage interest deduction on your income tax return.