Friday, February 12, 2010

How to avoid huge pre-payment penalties.

In this case hindsight is 20/20. Low posted rates mean that anybody trying to sell their property before the maturity date will be hit with some pretty hefty mortgage pre-payment penalties.

Most banks offer two pre-payment penalties on their loans; three months payment or the interest rate differential (IRD) quoting whichever is higher. With posted rates so low you're going to be looking at the IRD penalty almost every time.

It works like this if your $100,000 mortgage is at 6.0% and matures in July 2012 you want to sell in March 2010. The bank takes the difference between your rate and the posted rate say 2.0% and charges that interest rate on the balance of your mortgage for the term left. Clear?

6% -2% = 4% on $100,000 for 28 months = a lot of cash ($10,000+ of dollars)

We always plan our sales/refinances based on the mortgage maturity date. It's simple planning that can save you surprise cash losses at sale.

The simplest thing to do is hold out to maturity but if you just can't wait try savvier options like assumptions, agreement for sales (wraps) or rent to owns.


richmond va real estate said...

Actually all this depends upon the terms of your orginal mortgage. It is possible there are clauses that allow amendments without requiring a new signature from
you.Likely notice would be required but it could, possibly, be pretty subtle. Still is sounds suspicious,especially in a consumer protection oriented state.

Unknown said...
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Unknown said...

Thanks so much for the information. Great real estate stuff.

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San Antonio real estate said...

Many consumers are unaware of the prepayment provisions. Not knowing however can cost you money. Prepayment penalties are used by lenders to attract investors to buy the loan is issued. Investors want to ensure they receive income from mortgages they buy a minimum of time.