What does it mean if the contract on your house is "locked in" for two years?

Question

My husband and I bought our house in April. We want to try to refinance. Our mortgage broker told us that the contract locked us in for two years. Does that mean that we can't refinance or even sell? We have looked at the house papers and we don't understand it.

Answer 1

That means the loan, not the house. You probably have a prepay penalty for the first 2 years, and you'll end up paying thousands in penalties if you refi before the prepay expires. Make sure the broker meant a prepay and not something else.

Answer 2

What I think you mean is that there is a 2 year prepayment penalty on your loan. This means that if you refinance within the first 2 years, you have to pay a penalty, which is typically one percent of your loan amount.

Figure out by refinancing how much you will be saving per month as opposed to not refinancing. Take into consideration how much the prepayment penalty is and whether or not it still makes sense.

Answer 3

He's referring to a "prepayment penalty".

Find the Promissory Note. There will be a paragraph with a heading like "borrower right to prepay" or something like that. Notes aren't long, you can find it.

What it probably says based on "locked in for two years" is that IF you pay the loan off within two years of inception, you owe them a penalty. Usually it is phrased something like "if you pay over 20% of the original balance in a 12 month period you owe six months interest on the amount over 20%". So, a loan at 10% for 240,000 that you pay off altogether will cost you six month's interest on $200,000, that would be $10,000.

You still can prepay, it's just a matter of penalty.

Also, some (not all) prepayment clauses exclude bona fide sales to third parties from the penalty provision.

Answer 4

That probably means that there's a prepayment penalty. So, if you refinance or sell prior to the 2 years being up, then you will pay a penalty. Your lending servicer can probably calculate how much that penalty will be (I've seen it average to several thousand dollars).

Answer 5

There's something in the contract where you agreed to stick with it for 2 years before you can refinance or sell. I should think the lender could take 5 minutes to show you where it is in your contract.