By Doug Fletcher,Staff Writer

A state consumer watchdog agency has issued an advisory warning people to be wary about mortgage prepayment penalties.

Monday’s caution comes at a time when many homeowners are looking to refinance their properties in order to take advantage of low mortgage interest rates.

Experts in the Office of Consumer Credit Regulation say many of those people are surprised to learn that their lenders are demanding a penalty for early payoffs.

The office is part of the Department of Professional and Financial Regulation.

Office regulators said prepayment penalties, which are designed to compensate lenders for the fixed costs of originating loans, are not prohibited for most first-lien, fixed-rate mortgages. Consumers, however, often forget about the fees until they’re in the process of refinancing.

Prepayment penalties can be costly. A typical prepayment penalty applies for the first five years of a loan, and equals 5 percent of the loan’s balance. A lender enforcing such a clause would add $5,000 to the payoff amount owed by a consumer refinancing a $100,000 loan.

Over the past two years, more than 100 consumers have contacted the office to complain about lenders imposing prepayment penalties, according to agency spokesman David Bragdon. If the penalties were clearly disclosed in the original loan documents, the state cannot force lenders to waive the charges.

“We advise consumers to negotiate for mortgages that do not contain prepayment penalties,” said Will Lund, director of the Maine Office of Consumer Credit Regulation.

Before committing to a lender, Lund said consumers should ask three key questions:

• Does the mortgage loan feature a prepayment penalty?

• If so, how much is the penalty fee and how many years is it in effect?

• Does the lender offer other mortgage loans without prepayment penalties?

“If borrowers think they may be financing again within the first several years of a loan, they should consider paying a slightly higher APR (annual percentage rate) in order to avoid a mortgage with a prepayment penalty,” Lund advised.

Borrowers also should carefully examine documents at closing. Some consumers have told state regulators that they signed documents disclosing a prepayment penalty, even though they were told that the loan would not contain such provisions.

And before refinancing a loan, people ought to review their mortgages to determine if they face a prepayment penalty. Regulators said it’s better to learn of the charge early in the process, rather than being given the bad news at the time of the refinancing transaction.

“In one extreme case,” Lund noted, “a Maine consumer was told that he owed a $2,900 prepayment penalty on a loan on which he had been paying for nearly 5 years. That penalty could have been avoided if the consumer had waited just 11 more days before refinancing.”

The Office of Consumer Credit Regulation licenses and examines non-bank mortgage lenders and responds to consumer complaints.

Online complaint forms are available at www.MaineCreditReg.org, or by calling toll-free, 1-800-DEBT LAW.