Pre-Payment Penalties Expiring and Rate Locks

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I read with great interest you article on the internet about pre-payment penalties. I find my self in a situation involving a pre-payment penalty and would appreciate your advice on this. I currently have a loan in which the prepayment penalty is up on DELETED. I have gone to another lender for a refinance and have been approved for a loan. Since this loan process occurred before the pre-payment penalty was up, my current lender has included it in the payoff demand information. My new lender has approved funding a loan with this penalty ($12,000) included. Documents are scheduled to be signed DELETED and the loan will be funded (13 days before the penalty expires). If I try to push back the date of my loan, my interest rate will go up, and I may not even qualify for a new loan since my FICA scores have dropped. My intention is to go through with the loan and have the loan person hold onto the payoff check until DELETED, after the pre-payment penalty has expired. I will then request a refund of this amount from my current lender. Do you think this strategy is viable or can you suggest an alternative without changing the the time schedule or amount of my new loan?

So you're want to be paying interest on two loans for two weeks?

Doing it your way is okay if you want to pay the penalty and are willing to pay interest and points and everything on the extra. If not, just have your loan provider get a rate lock extension. You'll pay about roughly a quarter of a point in fees, but that's less than the interest - or the penalty. Have your new lender get a payoff demand valid from expiration of the pre-payment penalty forward.

Your new lender is not going to tolerate being second in line for several weeks. Until that previous trust deed is paid off, the loan to value ratio is higher than their underwriting allows, and I'll bet that debt to income ratio is as well. Suppose there's a fire during those two weeks? Is there enough money in the insurance to pay both of them? The answer is no. Until that prior loan is paid off, the value of the property is exceeded by the loans against it. This is the purpose of escrow - and there's escrow in a refinance as well as in a purchase. You don't get that check - you only get what's left over after escrow does their job, which includes paying off the prior lender.

As to your personal situation, why has your FICO dropped? Credit scores don't drop without a reason, and one credit check isn't going to make that much of a difference. Basically, it looks like your lender is trying to make more money off you, and feeding you a line of nonsense to facilitate it. By boosting the loan amount, their compensation in the form of origination and yield spread rises. Okay, so 1% of $12,000 is only $120 - but that's $120 more for basically the exact same work. Not to mention the loan is funded now and they get paid now. Loans that are finished don't fall apart. I'd bet millions to milliamps that they're intending to fund your loan before the penalty expires. If they weren't, there's no reason to have you sign loan documents that early. I wouldn't have you sign until your right of rescission runs out concurrently with your penalty.

From the information given, this is not likely to be a lender with your best interests at heart. About the only thing I can even think of where it might be in your interest is if there's a notice of default or trustee's sale looming - and then we have to consider whether paying that penalty and all of the costs of the loan is really in your best interest. And since you didn't say anything about either one of these situations, I have to question the wisdom of basically volunteering to pay 6 extra months of interest plus loan costs. In this loan environment, I just have trouble believing that the new loan is going to save you that much money over the course of the time you are likely to keep it, let alone over the two weeks early you're paying it off. Even if you're at 8% now and moving to a 7 percent thirty year fixed rate without points, that's over $15,000 you are spending to save 1%. On a $300,000 loan, you're just getting close to breaking even at 5 years, which is longer than ninety or ninety five percent of everyone keeps their loans, and your balance is still higher. And yes, rates are going up, but neither I nor any other analyst I read is expecting that much higher, that quickly - even if your rate isn't locked, and rates that aren't locked aren't real.

Rate lock extensions cost money. But sometimes they're still the smart thing to do. In your case, it's spend approximately a quarter of a percent of your loan amount (depending upon lender policy), or three to four percent for six months interest that I can't see any compelling reason for you to owe.

Caveat Emptor


PS next time, you might contact me to give me a shot at your loan before you're in this position. I do loans all over California.

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This page contains a single entry by Dan Melson published on July 24, 2007 10:00 AM.

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