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<jhurlbut@gmail.com> wrote in message
news:1159058592.716411.111550@k70g2000cwa.googlegroups.com...
> I am a Real Estate agent and many clients have asked me this question
> and it seems as though mortgage brokers avoid it. So I thought I would try
> it here.
>
> When do mortgage brokers decide that a particular loan is deserving of
> the dreaded prepayment penalty?
>
> It seems as though there would be added incentive by the lender that
> the loan will eventually be sold to to have a prepayment penalty to
> assure they would receive a certain amount of interest payments. Is
> that incentive offered to the person brokering the loan? Similar to
> YSP?
>
The Prepayment Penalty is really quite simple. The lenders go after
investors to get money to loan. The lender promises the investor a certain
return on the investment dollars. If the borrower repays the loan early,
then this affects the return to the investors on the dollars they invest.
The lender is holding the bag for a certain sum that will come if the loan
matures to the end of the prepayment pentaly term -- typically 3 years, but
can vary. If the borrower repays the loan in its entirety, or repays more
than 20% (another variable figure) of the Original Loan Amount in any
payment year, then the prepayment penalty will kick in.
If the borrower understands that they will keep the loan for 3 or 5 years,
then they can benefit from ACCEPTING the prepayment penalty in exchange for
a lower interest rate. If I was offering loan dollars, I could offer a
program for 6.125 WITH a prepay, or 6.500 without. The borrower would
probably like the lower payment, but they would be locked into the loan
program for whatever the prepayment period is. If they thought they would be
refinancing or selling the property in less than the prepay period, then the
prepay would be a bad thing. But, if they thought they would for certain
keep the property, then the prepay would not be a burden UNLESS some
unforeseen situation came up.
> Also, anytime any of my clients have applied for a loan and have been
> told they have a pre-pay penalty, I tell them to ask the broker if
> he/she will remove it and almost invariably they do. So it doesn't
> seem as though the pre-pay penalty is a mandatory item. It definitely
> does not benefit the consumer, it does benefit the lender. I am
> assuming it must also be a benefit to the broker.
>
Well, the prepay will benifit the borrower by giving them a lower rate
because they (the borrower) agree to mitigate a certain amount of the risk
that the lender faces.
A prepay penalty isn't a bad thing, it merely sets a requirement to not
sell or extract equity during the prepay period. The vast majority of
borrowers will never be affected adversely by a prepay. A possible exception
would be the borrower that takes an ARM today, and the rates rise to where
they are higher than a fixed rate loan. In this case, the borrower simply
has to do the math, is it cheaper to pay the penalty and refinance to a
lower fixed rate, or pay the higher ARM rates until the prepay period
expires. YOU, as a real estate professional, should have a mortgage
calculator where you can help your clients to see what is happening.
Alternatively, as a Buyer's Agent, YOU should establish a relationship with
a mortgage loan officer at a nearby broker's office, and then have all of
your buyers get filtered through a loan officer that you can talk to and get
on the same page with. Some borrowers are flakey, and your loan officer is
the guy that can help you understand what program the buyer is facing.
> Any answers would be greatly appreciated.
>
> John
>
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Re: When are prepayment penalties added to loan contracts?
