Question about Prepayment Penalty

[ThePeacock]

To the pro's,

My prepayment clause reads this:

"The first 24 months of the loan is called the "Penalty Period." In any twelve month period during the Penalty Perioud, I may prepay up to 20% of the original principal amount of this Note witout paying a penalty. If I make a prepayment in excess of 20% of the original principal amount in any twelve month period during the Penalty Period, I will pay a penalty. The penalty will be equal to the lesser of a (a) six months' advance interest on any amount prepaid in excess of 20% of the original principal amount of ths Note or ( two percent of any prepayment in excess of 20% of the original principal amount of this Note."

Orignal Principal is $82,400.00

Current Princiapal is $81,678.14

Current Rate: 7.3%

Question 1) What would my prepayment penalty be if I refi'd right now? Am I right in subtracting 20% from orignal principal and then taking 2% of that amount and that would be the pentaly? 82,400-20% = 65920. Then take $65920 x .02 and that = 1318.4 ? Would 1318.40 be the penalty?

Question 2) Looking in to your crystal ball, if you were me would you (a)accept this penalty and roll it into the new loan to try and secure a better rate today, or ( wait another year until the pre-pay is up and hope the rates aren't any worse than what I currently have.

Question 3) Do lenders typically or even ocassionaly refinance their own loans for a better rate. Is it worth even asknig? For instance, Present to them that you are looking to refinance and would they be willing to in order to keep your busniess? If so, is it likely they would waive the prepay?

Thanks for confident replies.

Kris

[firstsource]

The penalty would be 532 (interest only part) X 6.

If you know what the inflation rate will be in a year, then it would be easier to give you advice. It seems that the Fed is keeping things under controll now, but will they be able to do that for an extended period of time? If they will then you won't be reducing your rate enough to pay the penalty. If they don't keep things under controll we may be looking at 8% conforming interest rates.

Mostly depends on if you are trying to get into a fixed rate for comfort/security reasons or if you are just trying to lower your rate. To just lower your rate it will take a long time to get a payback on your investment of paying closing costs & etc.

My experience is to wait it out.

There are some lenders that will refinance your loan without a penalty, but they don't have much incentive to do so in your case.

Charles

[ThePeacock]

Why would it be $532 x 6 if the clause states that the prepayment penalty would be the lesser of (a) or (? They way I figured ( it was $1318.40.

Of course I could be terribly wrong.

[jq26]

Why would it be $532 x 6 if the clause states that the prepayment penalty would be the lesser of (a) or (? They way I figured ( it was $1318.40.

Of course I could be terribly wrong.

I agree. But I think there are two ways to interpret the clause so that ( could be one of two sums:

1) If you make a payment more than 20% of the original principal, then the penalty is 2% of the original principal: (.02) x ($82000)= $1648

OR

2) If you make a payment more than 20% of the original principal, then THE PORTION OF THE PRINICIPAL BEYOND THE 20% is the only sum figured into the prepayment penalty: (.02) x (.80 x $82000) = $1318.40.

The way it is worded, I suspect that you will have to pay $1648. Still beats the $3k figure!

"The penalty will be equal to the lesser of a (a) six months' advance interest on any amount prepaid in excess of 20% of the original principal amount of ths Note or ( two percent of any prepayment in excess of 20% of the original principal amount of this Note."

Orignal Principal is $82,400.00

Current Princiapal is $81,678.14

Current Rate: 7.3%"

[ThePeacock]

I follow you, ANY prepayment in excess of the first 20% so meaing if you're paying it off then the whole amount you pay would be subject to the 2% penalty. Good to know where I stand.

[firstsource]

I am glad to find out that I was wrong on the amount of prepayment owed.

The lender said that the penalty is $1,303.96. So your calculations were pretty much correct.

Charles