Prepayment Penalty Mortgage Question

s.thompsonApril 19, 2013

Were told by lender that there was NO prepayment penalty clause in mortgage. Find that there IS a sentence saying exactly that, however next sentence states that the loan's finance charges (which I'm taking to mean total amount of interest paid on the loan over the life of the loan) will ALWAYS remain the same. So, this says to me that while a person could indeed make extra/larger mortgage payments to pay the loan off sooner than planned, there would be absolutely NO purpose in doing so as there would be no benefit in doing so. Am I understanding this correctly? Is this common? Is this legal? Thanks for any help.

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marie_ndcal

I would suggest take this to your lawyer for the best legal advice.

    Bookmark   April 19, 2013 at 9:28PM
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s.thompson

Thanks. What I am really hoping for is to find out if this is something that others are finding in their mortgages too. I guess I should not have asked if it was legal here. I know that would require the services of an attorney to determine. It seems to me to be a way to assess a prepayment penalty while saying you weren't.

    Bookmark   April 19, 2013 at 10:40PM
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heleneglucksman

Perhaps the finance charges are referring to points & fees paid at the origination of the loan? Is this a loan that you already have or one you are contemplating?

    Bookmark   April 20, 2013 at 7:57AM
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graywings123

Could you quote the two sentences to us? The second sentence might be saying that the interest rate is fixed versus variable.

    Bookmark   April 20, 2013 at 8:18AM
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brickeyee

The feds clamped down on prepayment penalties a few years ago in many cases.

The usual second sentence means that the payments do not change if you make pre-paymets of principle.

What changes is the amortization of the loan (how the payments are allocated to principal and interest) and the length (number of payments to pay off the loan) is reduced.

If you agreed to make 360 payments of $1,000 and then make a pre-payment of $5,000 to principal you STILL owe payments of $1,000 until the loan is amortized. It will take less than all 360 payments though to reach zero balance.

You have 'saved' the interest on the latter payments.

Post the exact wording to make sure.

ETA:

Adjustable rate mortgages typically recompute the entire amortization schedule at each rate change based on the mortgage balance at that point.

Payments may go down if you have paid down the principal faster than was required in the period before the rate change.

If the rate adjust every two years, and the end of the second year a new rate is assigned, and the amortization is computed based on 28 years for an initial 30 years mortgage.

This post was edited by brickeyee on Sun, Apr 21, 13 at 10:21

    Bookmark   April 20, 2013 at 11:07AM
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s.thompson

This is from the Federal Truth-In-Lending Disclosure Statement. At the top there is the Annual Percentage Rate box then the Finance Charge box (e) that says: 'The dollar amount the credit will cost you.' $xxxx,xxx.xx amount. This is a very large amount and is I am fairly certain, the total amount of the interest that a person will pay on the loan over the full life of the loan.

Then down towards the center of the page under the heading 'Prepayment:' is the wording: 'If you pay off this loan early you may/will not (and the will not box is x'ed) have to pay a penalty. And you may/will not (and the will not box is x'ed again here) be entitled to a refund of part of the finance charge.'

And since the aforementioned finance charge seems clearly to be the interest amount on the loan for the full life of the loan, then it appears to me at any rate, that while they are not allowed/trying to smack you with an extraneous penalty if you pay the loan off early and clearly stating that, they are still dinging you by not adjusting the total interest on the loan if you make extra principal payments and pay the loan off early.

Is anyone else seeing this type of language in their mortgage lately?

    Bookmark   April 22, 2013 at 4:21PM
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s.thompson

Oh, and this is a fixed rate 30 year purchase (not refinance) conventional loan that is being contemplated.

    Bookmark   April 22, 2013 at 4:25PM
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rrah

Those are boiler plate documents. You are misunderstanding the purpose of the document.

It is a federally required document that lenders MUST provide. It's not a part of the mortgage document.

You are correct in saying that the finance charge is the total amount of interest you MIGHT pay if you take the entire 30 years to pay off the loan with no extra payments. It's not the total amount you have committed to paying. The total amount you MUST pay is indicated in your mortgage document. Again, because the purpose of the document is to show you the truth, it must include that number.

I know you signed a lot of documents so it's easy to confuse what is "the mortgage" and what all the other things are.

"You will not be be entitled to a refund of part of the finance charge." This simply means that if you pay off the mortgage early and some how ended up paying extra interest because of the early pay off, you don't get the money back.

    Bookmark   April 22, 2013 at 5:56PM
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brickeyee

"You will not be be entitled to a refund of part of the finance charge."

you will not get back any part of the finance charge already paid if you pay off early.

Mortgage interest is computed in arrears (unlike rent that is paid in advance).

That means each month the first thing taken from the payment is the interest for the previous month on the mortgage balance.
If you pay off the mortgage (or any part of it) early, you will not get interest back since it was for last months principal balance.

And it is correct that the 'Truth in Lending Disclosure' is NOT part of the mortgage or note.

ETA:

It also means you get back no portion of discount points or fee points you may have paid.

This post was edited by brickeyee on Tue, Apr 23, 13 at 9:52

    Bookmark   April 22, 2013 at 7:32PM
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