Pre-Pay Penalty..Pay it Now? It Might be Worth it
As a Mortgage Broker in Palm Beach Gardens, (Northern Palm Beach County) Florida part of my job is to order appraisals for my clients who wish to refinance their property. With the amount of Short Sales and Foreclosures that are in the area many of my clients believe it really does not effect them unless they have plans on selling their home. Think Again!
Roughly eight months ago one of my clients came to me to refinance out of their current mortgage and into a lower rate. At the time they still had a Pre-Pay Penalty of $9,000 which they would have to pay in the event they would sell or refinance the property. They planned on staying in the home for long term. At that time, the home appraised out where they had over $80,000 in equity in their home. The clients decided that they would wait the eight months until the Pre-Pay was over. I believe most people would have done the same thing at that time.
Now eight months later with all the Short Sales and Foreclosures that are going on in South Florida they have lost that $80,000 in equity and now owe what the house is worth. (100% Financing) Their ARM is now due and they are facing an adjustment next month. This is a big problem in the industry with ARMS adjusting and the homes loosing equity. Especially if you need a loan that would require outside of the norm. (Stated, No Doc, etc...) In This case, if they would have chosen to pay the penalty they would be in a much better program now with a lower rate and more of a long term goal. (which is what they wanted)
My suggestion is if you are in a solid equity situation and have a Pre-Payment Penalty still enforced you may want to consult your Full-Time Mortgage Professional. As I have always said either pay now or pay later but you will have to pay. However, in this market being proactive may help you. Don't wait until your ARM Adjusts and then complain that you can't do anything.
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Full-Time Mortgage Broker in South FL. Palm Beach County. Specializing in Hard Money / Private Money, Foreign Nationals, Jumbo and Super Jumbo Loans. In addition I work with Today's Premiere Lenders.
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It IS a good idea to consult a professional when making a decision like this. Sometimes just having someone else look at your situation leads to a better decision. Thanks.
I had a similar situation but my sellers did decide to sell with a heavy prepay of $9600. had they waited another 8 months, they would not have been able to sell as their house would have been upside down.
Sad situation and unfortunately many people are facing it. Yes, I believe they should contact a professional and their lender.
Dan, I agree sometimes a 3rd person might have a cleared head especially if they are a professional in that industry
Steve, They where smart by listening to you. I met a couple that did the same thing about 6 months ago and is not starting to look again. Thanks for your comment
Missy, They did contact a professional..:-) it was my client..:-) lol anyway...You are right but now it is a much more of a difficult situation.
I had this situation come up in California nearly 6 months ago myself. The problem I had with the clients was indecision and "advice shopping". They were being tugged and pulled in all sorts of directions. Long story short, they ended up doing nothing at all. I fear for their situation when their penalty is up and their value is severly compromised. Jimmy Buffett once said "Indecision may or may not be my problem"... clearly it is becoming everyone's problem. Thanks for the post!
pre-pays need to go away
Matt,
Boy have I seen alot of these situations, and when it comes down to decision time, They seem to cut off their Nose to Spite Their Face...
Tom Weiss
Jessee, I never heard that from Jimmy But that is great. Thanks for your comment
As for the second comment....from someone in southwest florida. That is like saying the dolphins should have won a game by now. What good is looking back. Also when you are talking subprime loans they are higher risk and theirfore just like in stocks and investments higher risk for the investor means higher rewards. By having the pre payment penalty for the investor they know they have lowered their risk.
Tom, I agree with you..
I saw almost the same thing happen to one of my clients. They waited down to the day that their prepay would expire before selling. Because of the market, they lost a substantial amount of equity. I tried to explain that I'd be happy to negotiate with their lender and try to get the prepay waived, but they insisted on waiting. Some lenders, especially in buyer's markets, are willing to waive the prepay rather than face foreclosure. And no, this is not the same thing as forgiveness of debt, for those who wonder.
Matt... in all honesty, this is very tough. Especially since many of us a few years ago would have thought the real market was going to drop that much. And the $9,000 penalty 1 to 1 1/2 years ago, unless their rate was in the 10% to 11%... that it didn't make a big difference in payment. If I went from 8% to 6.5% and still added the prep-pay..... I do understand your point... they need to consult a professional. But unless we all had crystal balls a few years ago, telling a client to do this now, might not have made sense. I did have a few that I did advise to pay it off during the prepay, because we wouldn't bs sure where their rate would be, even if fixed... but again, each situation is different and hard to judge. Just my opinion. But this is good to educate others and to make them at least aware of this.
You are so right & we need to keep this in mind now. Who would have thought at that time that this would be the situation? But, that's why we have professionals like you!
Elizabeth, Don't you wish your clients would of listened to you? You can lead a horse to water.. Oh well thanks for your comment
Jeff, This was not a few years ago only 8 months. You are right who would have thought that the market would of dropped as much as it did. Now in Florida in some areas they are predicting 2 more years like this
Marc, Exactly would of thought.. Thank you.
if there is a way to get them into a 100% refi, they still might be better off
and their decision to wait might have still been smart
the reason that I believe it still could have been smart are:
David, Correct however this was a stated loan back then and would be today so they are not better off to refi at the present time. Also as I stated they are thinking long term they want to stay in the house for many years. The market will turn around and now looking back it would have been a good move for them to spend that money and owe more than what the house is worth in todays market and not be forced to pay a higher payment which is what is going to happen now.
Great point! There are situations where biting the bullet on a pre-payment penalty can be worth it.
Dan
Matt,
Great post..borrowers need to look at the whole picture. With the way the market is these days and loan guidelines changing and options disappearing, the borrower can't afford to wait.
Great jam from Pink Floyd by the way:)
Dan, Thank you. I agree
Cheryl, Correct they need to look at the whole picture. I love that song..of course if I start listening than I have to listen to whole album. :-)
Money, Money, Money! Thanks for adding the video clip, Matt! Evaporating equity and much, much higher hits to the pricing for 100% financing (if it's available at all) make many of these loans untenable in the present market.
Mike in Tucson
Mike, My pleasure hoped you liked the video! You hit the nail on the head thanks
Matt,
So are you telling me that by paying early on a soft prepay it might be less out of pocket money versus hoping to profit more after the prepayment penalty ends? It could be the sensible thing to do if the numbers work. Back in the day good old days it would not have made sense ..I had many clients who waited and then sold. They made money. I guess you would have to sit down and run the numbers carefully before choosing that rout.
Neal, If you are selling now than maybe this would not make sense. However, in this case the person wants to stay in the home and is thinking long term so it does make sense to pay it. With some area's in a downward spiral it might make sense now to bite the bullet while you have the equity and rates and programs are available to you. Either way it is a case by case and that is why the consumer really needs to deal with someone who is a FULL-TIME Mortgage Professional and not friends or relatives.
Consulting a professional only makes sense when dealing with mortgage decisions!
Bill & Barbara, I agree...Thank you
Great Advice Matt! A professional who truly has "the customer's best interest" in mind would suggest something like that. GREAT POST Matt!
Susie, Thank you. A Professional will look at the whole picture in this case they should have paid it but oh well..:-)
Matthew-What gets me are the ones that took all the equity out and now need to sell, and get mad that they are not going to make money, excuse me! You already spent it! Katerina
Matt - again another great post. I am amazed as to how you stay on track and keep the posts coming.
With rates as low as they have been and probably heading south some more, the clients I have told to hold off on refinancing because of their pre pay may be needing a phone call soon.
By the way - classic Floyd clip! thanks
Katerina, LOL..sorry for laughing but you are right..:-)
Lewis, Glad you liked the post and the music. I just wished I convince my client to refinace sooner and bite the bullet.
Matt this is sound advice for the seller - I love how you protect your client even after the deal is closed - we never know what tomorrow will bring
Thesa, Thank you . Very true we never know.
well people - with the way rates have been plumeting... maybe our clients were better off to wait? crazy huh? I think a 30 year fixed paying points can be had in the 4's withing 60 days... anybody agree with me?
Lewis, Rates can keep dropping but if the LTV's are going up it doesn't really matter. It has to be a nice mix of the to.