Is there a PrePayment Penalty? Is There a Downside to Prepaying Your Mortgage?

Is There a Downside to Prepaying Your Mortgage?

 By Dottie Wells  Bethany Beach L&F Mgr Newsletter

Long before you settle on a mortgage lender, one of your interview questions should be, "Is there a prepayment penalty and if so, how much is it?" Unfortunately, too many homebuyers don't understand what a prepayment penalty is, how it works, or even if they are paying it.

Prepayment Penalty

When you take out a mortgage but your credit is less than stellar, banks want to make sure that you will at least stick to your obligation for a few years. Most prepayment penalties come in three-, five-, or even ten-year terms.

Once you have made your mortgage payments for the term of your prepayment period, you no longer face any penalty. If you do pay off your loan before the end of your prepayment period, however, you are going to be on the hook for up to six months of interest on your remaining balance.

How It Works

Most prepayment clauses work this way: If you pay your loan off early no matter the reason, you will have to pay a penalty for it. Some clauses will waive the penalty if you are paying early because you resold the house.

Some mortgage agreements allow you to pay up to 20% above and beyond what you have to pay in any given year without a penalty. Others will penalize you for paying any amount above your agreed upon monthly mortgage payment.

If you refinance your mortgage you do not get credit for the prepayment period that you have already exhausted. The clock starts all over again from the time you refinance. Homeowners who refinance in order to resell within a few years get hit with the prepayment penalty if they do not have a resale waiver written into their mortgage loans.

Why It Is There

A prepayment clause is helpful if you really want to own a home but your credit score is not high enough, or if you can reduce your monthly interest payments by a hundred bucks a month. Think of this clause like your free phone cell phone deals: You get the phone for free as long as you sign up for a two-year contract. If you terminate that contract early, you will be charged the retail cost of the phone. In essence, the phone is not really free.

Banks will cut you some slack on your credit score or your interest rate as long as you guarantee that you will be making regular monthly payments for years to come. Yet the vast majority of homeowners don't buy a primary residence and then flip it two or five years later. It winds up just being an additional cost to taking out a mortgage for most.

Should You Prepay Your Mortgage?

The first thing you have to do when deciding whether or not to prepay your mortgage is to verify whether or not you have a prepayment penalty clause. If your agreement allows you to waive the penalty upon resale, you have one less thing to worry about in that instance.

However, if you still have a year or two left before you avoid the prepayment penalty, waiting may be the best move. Otherwise you could end up paying an extra $10,000 in penalties for the average home.

Buying? What You Will Need to Finance a Vacation Home

What You’ll Need to Finance a Vacation Home 

By   Beth Braverman  for  Realtor.com  January 19, 2016

 Growing numbers of Americans these days are living a prime variation of the real estate dream: you know, the one about owning a property in your favorite place that you can use as a second home or just a much-needed escape from the pressures or banality of the everyday. In fact, the phrase “vacation home” practically makes us giddy, whether the place in question is located in the mountains, on the water, or in a bustling city.

Interested? Obsessed, even? Then you’d better get your finances into tiptop shape.

Certainly you’ll find plenty of company. Vacation home sales soared to 1.13 million in 2014, according to the National Association of Realtors®. That’s the highest level since NAR began the survey in 2003, and a 57% increase from 2013.

The spike reflects an improving economy—as well as demographic shifts that have more baby boomers purchasing vacation homes intended to serve as their primary residence after retirement. (Want to win a fabulous vacation home? Click this link to enter the HGTV Dream Home sweepstakes, and you’ll get a bonus entry!)

Seven in 10 vacation-home buyers use a mortgage to finance the purchase. So if you’re considering buying a second home, here’s what your lender will be looking for:

Good credit

                              

You’ll need a credit score in at least the mid-600s to qualify for a mortgage on a vacation home, but the higher your score the better rate you’ll get on the loan.

“Our best rates tend to be for clients who have a 720–740 FICO score,” says Quicken Loans Vice President Bill Banfield. “As the score goes down, the costs increase incrementally.”

If you know you’ll be making a vacation home purchase in the near future, check your credit reports now to see if there are any errors or if your score needs improvement.

A higher down payment

While there are conventional loan programs for primary home residences that allow you to make a purchase with as little as 5% down, you’ll need to put down at least 10% for a vacation home. As with conventional mortgages, putting down at least 20% will give you access to the best possible rates without having to pay mortgage insurance.

Extra cash on hand

In addition to having enough assets to cover closing costs and moving expenses, you’ll need to have cash reserves equal to at least two months’ worth of expenses on the vacation property in order to get loan approval.

Income to support both properties

Ideally, lenders are looking for a debt-to-income ratio of 43% or less for both the vacation home and your primary residence. Typically, that means the total cost of the mortgages and taxes on both homes, along with any other household debt such as student loans or car payments, can’t equal more than 43% of your total family income. In some circumstances, lenders may be able to make an exception.

“If you’re pushing the envelope with your debt-to-income, it helps to have a higher credit score or put down a bigger down payment,” says Kevin Leibowitz, president of mortgage broker Grayton Mortgage.

Proof that it’s a vacation home

The financing requirements of a vacation home tend to be more favorable to borrowers than those for an investment property, so your lender will want to know that the home really is going to be used by you for vacations rather than to rent out for income. Typically that means proving the property is at least 50 miles from your current home and confirming that you have no plans to rent out the home for large parts of the year.

Beth Braverman, an award-winning journalist and content producer, covers real estate, personal finance, and careers.

Considering a Reverse Mortgage? Discuss this home equity loan with your adult children.

Reverse Mortgage and Your Adult Children

RISMEDIA, Saturday, January 23, 2016— (TNS)—You’re thinking about getting a reverse mortgage. Should you discuss your plan with your adult children? Maybe. Every senior homeowner’s situation is unique.

“I wish I could give you one best practice that’s optimal for every family, but it’s more complex than that,” says Joseph Goetz, an associate professor for the department of financial planning, housing and consumer economics at the University of Georgia and an editorial board member of the Financial Therapy Association.

Reverse Mortgage

A type of home equity loan that is available to homeowners age 62 or older. No repayment is required until the borrower dies or moves out. At that time, the principal and accumulated interest are repaid, usually by selling the house. Most reverse mortgages are insured by the Federal Housing Administration, which calls the loan a home equity conversion mortgage, or HECM (pronounced HECK’m).

As a general rule, Goetz says, more communication is better, but family dynamics and the family’s financial culture are important, too.

“In some families,” he says, “the kids would be really upset if Mom and Dad gave up the house without talking to them. In other families, they would not.”

A reverse mortgage doesn’t necessarily involve giving up your house — at least, not as long as you live there. But Goetz’s point is well-made: Many adult children have an emotional attachment to their childhood home or expect to receive their parent’s home free of any encumbrance upon the parent’s death.

Death: A Bad Time to Surprise the Kids  

A reverse mortgage discovered after the fact can come as a surprise, shock or disappointment, suggests Buz Livingston, a financial planner for Livingston Financial Planning in Santa Rosa Beach, Fla.

He recalls a client whose father and stepmother took out a reverse mortgage without their daughter’s knowledge. Another client’s parents took out a reverse mortgage and informed one sibling but not the other.

“The children need to be involved just to make sure everybody is on the same page and there is not a big surprise,” Livingston says. “Just keep it simple. Say, ‘This is what we are going to do and if this (house) is something you want to hold on to, speak up.’”

Search for today’s lowest mortgage rates here on Bankrate.com.

You Can Inform without Seeking Advice

Whoever will be responsible for your estate should be aware of your reverse mortgage and the options to repay it, says Cara Pierce, a financial specialist at ClearPoint Credit Counseling Solutions in Fresno, Calif. Many times, that executor or administrator will be one of your adult children.

“It doesn’t mean you have to get them involved or take their advice,” Pierce says. “But if I am setting up my son to be trustee, it would be nice if I told him that if I stay (in my house) until I die, he needs to make sure to pay off the loan on my behalf.”

What Triggers the Loan Repayment?  

Heirs aren’t personally responsible for the debt, but the house will have to be sold to repay the reverse mortgage unless there are other ready funds, retirement savings or life insurance, or the adult child can qualify for a new mortgage.

Disclosure also matters because if you move out of your home for an extended period, the reverse mortgage likely will have to be repaid, which could trigger the sale of the house if there aren’t other assets to pay it.

“It has to be your primary residence,” Livingston explains. “If you are living in a nursing home, it’s not your primary residence and the bill comes due.”

Not Just about Money

The conversation, if you decide to have one, should be aligned with your goals, which might include a desire to address your adult children’s emotional concerns, expectations or sibling rivalries, Goetz suggests.

“If one of the parents’ goals is their adult children’s happiness or to leave a bequest for their children, a financial planner will say, ‘You need to bring your kids into the conversation because that’s consistent with your goals.’ Another set of parents could say, ‘My kids are doing fine. It’s my business, and my kids won’t feel any adverse emotional reaction to not knowing I took a reverse mortgage.’ In that case, you don’t need to tell your kids,” he says.

When to Talk about It

The house itself or your broader financial planning agenda could be entry points to start the talk with your adult children.

Another option would be to include your adult children in the financial counseling that’s required for some types of reverse mortgages. Pierce says a lot of housing counseling is done over the phone and adult children can participate in the call.

Livingston says he’s “not anti-reverse mortgages,” but he also says you should speak with your adult children before you get one.

“I always make a point of hammering pretty hard to my clients that they really need to talk to kids about it,” he says. “It’s important to have that discussion.”

Marcie Geffner writes for Bankrate.com.