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Thread: Mortgage repayment scenarios; Pre-payment Q's

  1. #1
    242_fair
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    Default Mortgage repayment scenarios; Pre-payment Q's

    I need advice from any dancers who own their own homes.

    I have a question about two mortgages, and I can't ask my broker until Monday...

    I am trying to pick a mortgage that will be the most flexable in terms of early re-payment without penalties, and also flexable in terms of being able to deposit chunks of money from work in various amounts at irregualt times.

    Here's what I have to choose from:

    Mortgage #1 has a "double up" feature and a "pre-payment" feature.

    Double Up Payment Feature: you may increase your regular payment amount once each calendar year, to a maximum of 100% over the term of your mortgage.

    Prepayment Feature: Prepay up to 15% of the original principal amount of your mortgage without charge each calendar year, in amounts as low as $100 each - at any time.

    Mortgage #2 has a "25/25" feature.

    25/25 Prepayment Options
    The bank gives you two options to pay your mortgage ahead of time. There is no additional interest or fee charged for either of these options.
    1. You may increase your mortgage payment (principal and interest) by up to 25% of the initial amount, each calendar year.
    2. You may prepay up to 25% of the initial principal amount, each calendar year.
    *This bank's web site said that the early 'payments' somehow get put in a reserve account, and if you miss a payment then the reserve covers this. But I don't understand how that is possible if the early payments supposedly go toward the principle balance??

    I'm very very intimidated by numbers and I'm having a problem understanding which of these two is best for me.

    What do you think is more flexable in terms of depositing random cash towards my mortgage, because I have a big problem holding onto cash for any ammount of time, and having to save up a specific ammount for a specific date (i.e. 20% on the mortgage anniversary) will probabally not work for me.

    thanks

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    which ever option you choose, it isn't normally not a problem to pay extra on your mortgage whenever you want. You just send in money with your account number whenever and explicitly state that it's for the principal balance (otherwise it might end up in escrow funds, which isn't bad, but it just sits there doing nothing until you get an escrow refund check at the end of the year.)

    Or you can send extra money in with the regular mortgage payment....but you don't have to get creative payment plans to pay extra.

    I've been a homeowner since 2001 with two different mortgages on two different houses, and both of them let me do it this way.

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    242 you're obviously dealing with highly structured mortgages offered by national companies. Mortgage #1 obviously must have huge pre-payment penalties involved unless the borrower strictly follows the partial pre-payment options that lender has spelled out. Mortgage #1's strict rules also appear to commit you to whatever changes you wish to make for a whole year at a time. Without having further details, all I can say on first impression is that this lender appears to be totally inflexible and probably will be totally ruthless if you deviate one cent from their strict requirements.

    Mortgage #2 appears to have a 'sleight of hand' element, in that they allow you to run a separate 'escrow account' for monthly overpayments or pre-payments. It would appear that the escrowed money only gets reconciled against the mortgage loan principal once per year, which explains the 'missed payment' ability. However, until the annual reconciliation, the amount of outstanding mortgage loan principal remains unchanged, as does the amount of interest calculated on that outstanding principal. This basically amounts to you giving this lender a 'free loan' of your escrowed money for a year, while they're still charging you full interest on the outstanding principal balance of the mortgage towards which the escrowed money has not yet been applied. Again without any other details, my first impression is that there may be lots of surprises in the fine print with this company based on their lack of transparency.

    As Emily points out, there are many local mortgage lenders who are WAY more flexible and way more straightforward than either of the bozos you have posted about. I have my own mortgage through a locally headquartered savings bank, and the terms allow me to make principal payments at any time which are immediately applied to the outstanding principal balance. I would highly recommend checking out your local options before signing with a national mortgage lender. It is obvious that, like 0% national credit card promotions, the national mortgage hawks are now resorting to various 'revenue enhancing' angles like prepayment penalties, strict rules and rigid payment schedules, escrowed prepayments etc. to boost their actual profit from a mortgage while still publishing a very low interest rate.

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    No a dancer, but...

    This is your home, and not a rental property, correct? And you're in the US?

    The most important question is probably what sort of rate you're getting. Is the loan fixed rate for the entire life, or can/will it adjust at some point?

    If you're in a situation where income is hard to document, you're in a little different world in terms of loan terms. Based on raw numbers, it's simply a "riskier" loan for the lender to make.

    Emily is right, you need to clarify whether extra payments you send in are applied to principal or not. It's not automatic. What you're describing is an escrow, and the lender will hold the money until the scheduled payments are due, then will withdraw from the escrow account and will apply to your loan balance. This is a little slimy.

    If Option #1 applies prepayments to principal, it's a better option.

    The standard mortgages that one gets directly from a bank almost always allow full prepayment at any time with virtually no penalty. I'm guessing the lack of documentable income (i.e., a paystub) is why you're being shown these options.

    My advice, not knowing all the personal details, is to at least make your broker show you examples of how this would work. He should be able to show you the interest that you pay over time, and what your loan balance does.

    A home is the biggest single purchase any of us are likely to make, and small difference sin loan terms can lead to lots of money. On a $200K mortgage, a 0.25% difference in rate is around $35/month or about $12K over the life of the loan.

    Have you tried tapping in the particulars yourself on websites like or to see if you meet their criteria? Don't be seduced by "option arms" or "interest only loans" unless you're sure you can afford them. They have attractive initial rates, but the payments can adjust significantly higher down the road. It's a big fear for some of us in the industry.

    Don't be afraid to ask questions - this is a big deal for you, and they should be willing to explain things.

  5. #5
    242_fair
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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    Quote Originally Posted by Melonie
    242 you're obviously dealing with highly structured mortgages offered by national companies. Mortgage #1 obviously must have huge pre-payment penalties involved unless the borrower strictly follows the partial pre-payment options that lender has spelled out. Mortgage #1's strict rules also appear to commit you to whatever changes you wish to make for a whole year at a time. Without having further details, all I can say on first impression is that this lender appears to be totally inflexible and probably will be totally ruthless if you deviate one cent from their strict requirements.

    Mortgage #2 appears to have a 'sleight of hand' element, in that they allow you to run a separate 'escrow account' for monthly overpayments or pre-payments. It would appear that the escrowed money only gets reconciled against the mortgage loan principal once per year, which explains the 'missed payment' ability. However, until the annual reconciliation, the amount of outstanding mortgage loan principal remains unchanged, as does the amount of interest calculated on that outstanding principal. This basically amounts to you giving this lender a 'free loan' of your escrowed money for a year, while they're still charging you full interest on the outstanding principal balance of the mortgage towards which the escrowed money has not yet been applied. Again without any other details, my first impression is that there may be lots of surprises in the fine print with this company based on their lack of transparency.

    As Emily points out, there are many local mortgage lenders who are WAY more flexible and way more straightforward than either of the bozos you have posted about. I have my own mortgage through a locally headquartered savings bank, and the terms allow me to make principal payments at any time which are immediately applied to the outstanding principal balance. I would highly recommend checking out your local options before signing with a national mortgage lender. It is obvious that, like 0% national credit card promotions, the national mortgage hawks are now resorting to various 'revenue enhancing' angles like prepayment penalties, strict rules and rigid payment schedules, escrowed prepayments etc. to boost their actual profit from a mortgage while still publishing a very low interest rate.
    Thanks Mel.

    You are right, they are national lenders (ING direct and the Toronto Dominion Bank).
    Good point about mortgage #2, and the escrowed payments; that's what I was worried about.

    I didn't even know that local lenders were known to be more flexable.

    When I talk to my broker on Monday, I'm going to tell him to find me more mortgages to think about.

    But, am I asking him to find me mortgage offers from a 'local lender', or is there actually a name for the kind of mortgage you have, where you can make payments at any time. That's exactly what I need, one where they apply extra payments against the principle immediately and without penalty. Is there a proper name for that?

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    But, am I asking him to find me mortgage offers from a 'local lender', or is there actually a name for the kind of mortgage you have, where you can make payments at any time. That's exactly what I need, one where they apply extra payments against the principle immediately and without penalty. Is there a proper name for that?
    ummm ... a 'conventional' mortgage ?

    Colsartorus might be right though that the eligibility requirements for a 'conventional' mortgage through a locally based lender may look sideways at 'self-employed' persons, and squint particularly harshly at self-employed persons who do not have a 'brick and mortar' investment in their business. But if you have credible financial records and tax returns I'd give it a whirl. In the US at least, savings banks and credit unions have provisions in their charters that require them to make X loans within the local community as a 'public service'. You actually don't even need to involve a broker - just walk into the nearest local/regional savings bank and ask about a 'conventional' mortgage yourself.

    PS just a personal opinion, but I can't see any realistic scenario where future interest rates are not going to increase significantly, and soon. Thus the thought of signing onto an ARM, particularly one with pre-payment/refi penalties, is more than a bit scary.

  7. #7
    242_fair
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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    Penalties ARE scary, you're right.

    But I thought that mortgages riddled with pre-payment penalties were the norm? Now you say that a 'conventional' mortgage is typically without penalties. This makes me wonder why the brokere even wasted my time with these mortgage offers at all, and made me feel like I have to choose between them. When in fact the mortgage that would suit my needs is a conventional one without pre-payment options. sheesh.

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    I'm like you, 242....I pay extra, but I don't really have any reason when and how much. If I had a salary job and I knew how much I made every month, it'd be easier, but I dance and I never know how much I'll be able to spend.

    I also know that I do stupid things with my money if I don't "get rid of it", so if I put it in a place I can't see it (like my mortgage principal), I won't spend it.

    Good luck with mortgage shopping. That's the most annoying part of house buying, but I love the part where you get to actually pick out houses

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    Quote Originally Posted by 242_fair
    Penalties ARE scary, you're right.

    But I thought that mortgages riddled with pre-payment penalties were the norm? Now you say that a 'conventional' mortgage is typically without penalties. This makes me wonder why the brokere even wasted my time with these mortgage offers at all, and made me feel like I have to choose between them. When in fact the mortgage that would suit my needs is a conventional one without pre-payment options. sheesh.
    You may not be qualified for a conventional mortgage. They tend to be pretty strict with whom they give mortgages to. When I was doing mortgages, I HATED using WaMu and Countrywide. They both sucked (in the doing things on time so we didn't lose the rate area).

    Also, WaMu and Countrywide (at last check) did not accept "over-payments". They put the money off to the side and would use it to add to your principal at the end of the loan period or if you were going to miss a payment, you could dip into that account. They may have changed the criteria, I'm not sure.

    My mortgage company has an option of paying your mortgage every two weeks. So, you would pay on the first and the 15th or you can pay in full by the 1st (or at least by the 15th which is when the "late charge" kicks in).

    Also, I believe you said that you do not live in the states, so I am not sure what to tell you in regards to your local mortgages. See how many scenarios you can get from different lenders. It's all going to come down to your credit. If you have stellar credit, you'll get more options. If you don't, well, you won't. You do NOT have to make an immediate decision on any of these things. You also have the right to go to a local bank and see what they can do for you. You are not "indebted" to finish the new loan with the broker.

    And, last, but not least...read the damn fine-print!! I cannot tell you how many times banks throw conditions, et al. in the fine print, but don't tell you about them. Read EVERYTHING and if you are not sure, ask. Do not sign your name to anything until you are completely and totally sure that you know what you are signing.

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    When you say "broker" do you mean real estate broker or mortage broker?

    My guess would be that if either of the above is true this "broker" has something in it for him, he is an some level an employee or salesman maybe an I/C for these two companies in question, even if he is your real estate broker, if he steers you to mortage company X or Y he is going to get some kind of commission or finders fee on the deal.

    They act like they are helping you out, doing you a favor if you will, but really it is in there interest that you make the choices they reccommend.

    We have seen examples of this sort of thing with stock brokers, why not mortgage/real estate brokers?

    Just a plug for a bank, no I am not an employee, but I have my mortgage with Wells Fargo, started out Norwest, until they were bought out by them , from day one this company has been very easy to deal with, I have Re-FI'd with them twice, for little or no fees, I pay automatically every month, I can change my payment when ever I want, there is no fee, the excess goes entirely to principal right away and if I won the lottery or whatever I could pay off the thing tommorrow with no added fees or "penalties"

  11. #11
    242_fair
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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    Quote Originally Posted by VenusGoddess
    You may not be qualified for a conventional mortgage. They tend to be pretty strict with whom they give mortgages to.
    Why would I qualify for both of the mortgages I mentioned, but not a conventional mortgage?

    Are conventional mortgages notoriously harder to qualify for?

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    You might go beyond your real estate broker and go to an independent mortgage broker. Give them your needs (specifications), specifically mention no penalties for gradual prepayment and flexibility you might need if you aren't working for awhile, but this is better handled by your own working funds/savings account.

    I believe most mortgage companies want to work out some of their initial costs by having your morgagage acct paying them interest over some months/years, so most will have some built-in penalty for early, big prepayments. Other than that, you need to build in some flexibility for yourself.
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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    A "conventional" mortgage typically means it will qualify for sale to either Fannie Mae or Freddie Mac, two quasi-government agencies. Yes, it is harder to qualify for these. They generally require documentable income and have debt to income ratios that one must meet. They are anxious to make loans to "low-to-moderate income" borrowers, but that isn't a synonym for self-employed.

    So, the conventional mortgage is the cheapest, but the most difficult to qualify for. But given that they own trillions of dollars of mortgages, not impossible by any means.

    Brokers are compensated by the lender for sourcing loans. On the types of loans you've described, the firm could be paid 6% of your mortgage balance. On a conventional, that'd probably be closer to 1%. The point is, to make sure you trust the broker you're dealing with. There are some shadier characters out there, and they sometimes give the entire industry a bad name.

    If you accept a mortgage with prepayment penalties, you should be given a lower rate. I'm not sure that's the case here, but that's the way it "should" work.

    In terms of how your overpayments are applied, it seems odd that escrowing them is prevalent. That may be the lender's default action, but you should typcially be able to have them change it. Consumer lending laws typically err via strongly on the side of the consumer, and only certain types of entities could refuse that request.

    It would probably be worth your time to try a local bank.

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    Quote Originally Posted by colsartoris
    A "conventional" mortgage typically means it will qualify for sale to either Fannie Mae or Freddie Mac, two quasi-government agencies. Yes, it is harder to qualify for these. They generally require documentable income and have debt to income ratios that one must meet. They are anxious to make loans to "low-to-moderate income" borrowers, but that isn't a synonym for self-employed.
    Truth. Conventional rates are, typically, lower...but much harder to qualify for if you have a "shady" file...meaning self-employed/light doc/etc. You could have stellar credit, but with no real income verification, you would not be able to go conventional. The loans you, 242, qualified for, are most likely sub-prime type loans (which are not BAD). Subprime used to mean people who had bad credit. But, these days, people from all walks of life use subprime due to not qualifying for conventional loans.

    Brokers are compensated by the lender for sourcing loans. On the types of loans you've described, the firm could be paid 6% of your mortgage balance. On a conventional, that'd probably be closer to 1%. The point is, to make sure you trust the broker you're dealing with. There are some shadier characters out there, and they sometimes give the entire industry a bad name.
    Truth. Brokers are paid basis points based upon how much your loan is and what kind of rate you are getting. The broker could get you a rate of 6% (this is hypothetical) with a compensation of 1.2 basis points. Or give you a rate of 6.5% with a compensation of 2.0 basis points. It's always wise to shop the rates around. Never take one person's word for anything. The good thing about brokers is that they usually are knowledgeable of the programs of lots of banks...the bad thing, is that they sometimes don't do what is best for you, instead doing what is best for themselves. Shop the rates...

    Oh, and once you pay for the appraisal, it's yours. Make sure you have a current copy.

    If you accept a mortgage with prepayment penalties, you should be given a lower rate. I'm not sure that's the case here, but that's the way it "should" work.
    To clarify, there are 2 types of pre-payment penalities. There is a strong pre-payment penalty: if you sell or refinance your home before your pre-payment period is up (usually 1-3 years) you are made to pay a certain % to "buying" out the loan. It can run into the thousands of dollars...but you usually have a lower rate. A soft pre-pay: No penalty if you sell your home before the pre-pay penalty time is up, but there is one if you refinance.

    If there is a pre-payment penalty, make sure you know the terms of it BEFORE signing anything.

    In terms of how your overpayments are applied, it seems odd that escrowing them is prevalent. That may be the lender's default action, but you should typcially be able to have them change it. Consumer lending laws typically err via strongly on the side of the consumer, and only certain types of entities could refuse that request.
    When you signed your mortgage, you agreed to make x payments for x amount of years. The lender is not required to allow you to "pay extra" to pay it off sooner. There are some lenders who will allow you to pay extra each month, but there is a fee for doing so. Some lenders will allow you to pay how ever much you want per month...but, it seems that more and more lenders are leaning towards escrowing the money and applying it at the end of the loan...where they'll lose less money.

    It would probably be worth your time to try a local bank.
    Truth. Always try several local banks and see what their rates/terms/programs are. The more knowledgeable you are about what is out there, the better prepared you will be to "talk finance".

    As to the Wells Fargo statement: I love Wells Fargo. Not only is their customer service superior, but their rates are good, as well!! We have both car loans with them and will soon be getting a mortgage with them. If you find a bank you like, stick with 'em!!

  15. #15
    242_fair
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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    Ok thank you everyone for your imput.

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    I work for a mortgage lender. Here are the answers to your questions:
    1/ Do not accept a loan with any kind of pre-payment penalty if you can. Some pre-pays are "hard" pre pays, which mean you will be charged a penalty if you re-fi or sell within a specific time frame, usually 2-5 years. avoid these at all costs. A "soft" pre-pay penalizes you only if you re-fi, but not if you sell. If you have, let's say a loan with a fixed rate of at least 2 years, and the lender gives you a 2 year soft pre-pay...that may not be a bad idea. you can typically buy out a pre-pay by raising your rate.
    2/ making bi-weekly payments has nothing to do with escrows. It simply means that you are paying a 30 year amortised loan on a 15 year pay schedule by making extra payments per year. If you pay every 2 weeks half of your payment, it will add up to an extra payment. Its a good idea, but make sure your bank allows it. many charge a fee for this. contrary to popular belief, making an extra payment or paying more than your payment and requesting that it be put to principal is not likely. A lender only has to apply payments based upon your contract, and I guarantee you that 100% of mortgage notes will read that any and all payments go to interest first. lenders are under no obligation to do any different, even if you request it, unless you sign a bi-weekly agreement.

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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    The best advice I can give you: deal with a mortgage company that is in your city. Banks are also a good place to do the loan. Countrywide (www.countrywide.com) is one of the US's top lenders. They are pretty easy to deal with also.
    Some lenders tell you to get on their bi-weekly payment plan but 1) that costs a start up fee & 2) you can do the same by sending a seperate check with "apply to principal" in the note section of your ck. Best of luck in your investment!
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    Default Re: Mortgage repayment scenarios; Pre-payment Q's

    2) you can do the same by sending a seperate check with "apply to principal" in the note section of your ck
    Not to be critical, but for a fact many types of mortgages will NOT allow this today. Instead the money from the separate check gets parked into a separate 'escrow' account which pays little or no interest, while at the same time the mortgage principal and the interest charged on that principal is not reduced. In fact, Countrywide's 'Reduced Rate' mortgage option has extensive restrictions on early repayment of principal and/or refi's.

    Scorp has laid out the 'straight skinny' above. I would only add that signing a 'bi-weekly payment' agreement is a two way street, in that you are then obligated to continue making bi-weekly payments for the life of the loan, you are considered delinquent if the payment is two weeks late etc.

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