Posted on 02/09/2007 10:41:11 AM PST by ex-Texan
With rates on many homeowners' adjustable-rate mortgages rising, some who would like to refinance into a new loan are finding they can't.
In some cases, that is because their loan carries a prepayment penalty, which would force them to come up with thousands of dollars if they refinance in the first few years. Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a low teaser rate that rises sharply after an introductory period.
* * * The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are still able to refinance but are finding it more costly than they expected.
"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," [says one lending official]. * * *
Prepayment penalties are most common with option ARMs and loans made to borrowers with scuffed credit. Some 84% of option ARM loans made last year carried a prepayment penalty, according to [one analysis] * * * Meanwhile, there are signs that some lenders are beginning to tighten their standards.
In a survey released Monday by the Federal Reserve Board, roughly 15% of domestic banks reported that they had tightened credit standards on residential mortgage loans in the past three months, the highest share since the early 1990s.
(Excerpt) Read more at realestatejournal.com ...
Prepayment penalties are most common with option ARMs and loans made to borrowers with scuffed credit. Some 84% of option ARM loans made last year carried a prepayment penalty, according to [one analysis] * * *
How would you like to pay six months interest in advance because you wanted to refinance your option ARM? Most ARMs are resetting at 7.5% today. If you have a 1% teaser rate and are paying 1.5% interest, that means you were underpaying at least 6.0%. On a $ 300,000 loan adds up to over $ 18,000 a year you owe for each year on the program. If you have been paying the loan for three years that means you may owe as much as $ 54,000 in unpaid interest. With prepayment penalties, that mean you must pay $ 9,000 to refinance your mortgage. You new loan will be for at least $ 354,000.
But what happens if the houses in your city have decreased in value? You may be unable to refinance. Want to learn more?
In the meantime, there is "Nothing to see here. Time to move on."
*Ping*!
I wouldn't because I've got an ARM and specifically made sure we didn't have any prepayment penalties.
I really have no pity for so called 'victims' of 'agressive lending tactics' or whatever else they try to blame the banks for. Someone doesn't instantly become a 'victim' because they are too lazy or stupid to read the fine print. It's a simple rule I follow - I don't sign anything I didn't read / don't understand.
"The bait was taken, now time to set the hook," say the lenders.
It's gonna be a buyer's market over the next 24 months.
I wouldn't. And every Option ARM I've seen has a 1% penalty...a lot less than six months' interest. Not a pittance if you owe $300,000, for sure, but less than you suggest.
Well...folks just have to read the fine print. I bought a house with a ARM...but it made sense for me...I wanted that lower payment so I could divert more of my income to the credit card debt and medical bills I have. It worked out for me...and I should be rid of all my unsecured debt in about a year and a half. In fact...the closing for my refi is this evening. I read the fine print...NO PREPAYMENT PENALTY. Oh and no cash outs either...I still have >%20 equity in my humble abode. People need to educate themselves about these things. Buying a house is a little more complicated than "see house...must buy it in any way possible".
NONSENSE!
Who would sign up for prepayment penalties, on a limited term adjustable?
My credit rating has gone UP over the last 3 years and my home appraised 14% higher than 3 years ago.
But if the banks get to hand out risky loans to risky people without threat of penalty then there is something non-capitalistic about the whole thing.
I don't want my tax dollars going to bail out banks who lent money out to losers and idiots.
There was nothing of substance there.
Get a better example. We don't know if it was staged, or what...and you can't even follow the guy.
If you have good credit, there's usually no benefit to taking a prepayment penalty.
If your credit is iffy, it can reduce the interest rate a good bit though.
But they were forced to buy a new house, and forced to borrow more money than they could afford, and forced to sign the papers requiring large penalties, and forced to..
Oh wait, they weren't.
You're right on the money. I to am a Loan Officer/Mtg Broker for a small town bank and people that get pre payment penalties have them because their credit sucks not because they got an ARM.
Individuals that sign up for a mortgage with a prepayment penalty did not do a good job shopping for a mortgage. There are many mortgage companies out there that offer mortgages without prepayment penalties.
OMG, people might have to actually satisfy the contract that they signed. Quick, call a lawyer!
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
and ACORN and their leftist state AG's are a group of tools fighting for fools.
The Mortgage Lender Implode-O-Meter
http://ml-implode.com/
Latest count of major US Mortgage lenders that have croaked since about Dec 2006:
21 lenders have now gone kaput
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