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Pre-Payment penalty: How to know when it's worth paying
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Eric
Posted 5/23/2006 1:56 PM (#1079)
Subject: Pre-Payment penalty: How to know when it's worth paying
I'm stuck in an option ARM and my rate is going through the roof. I started in the 5's and am in the 7's now, it looks like it will keep getting worse. I have a $10,000 prepay penalty for the next 18 months. My loan officer says it's worth it to pay because he can fix me at a lower rate. He also says that if I wait until the prepay is up when I do fix it my rate will be much higher. Is there some calculation I can do to measure whether it makes sense to pay the prepay penalty.
lilrhody101
Posted 5/25/2006 11:11 AM (#1088 - in reply to #1079)
Subject: RE: Pre-Payment penalty: How to know when it's worth paying
if it was the same LO that put you in the program I would put it off or find another LO to work with
Guest
Posted 5/25/2006 11:11 AM (#1089 - in reply to #1079)
Subject: RE: Pre-Payment penalty: How to know when it's worth paying
10,000 pre-pay is pretty big....what was the loan size.
RAMetts529
Posted 6/6/2006 10:58 PM (#1148 - in reply to #1079)
Subject: RE: Pre-Payment penalty: How to know when it's worth paying
Email me the figures and I will be able to tell you within 1Min...
askforgreg
Posted 8/30/2006 8:15 PM (#1269 - in reply to #1088)
Subject: RE: Pre-Payment penalty: How to know when it's worth paying
[QUOTE]lilrhody101 - 5/25/2006 8:11 AM

if it was the same LO that put you in the program I would put it off or find another LO to work with[/QUOTE]

Exactly. If you're going back to an LO that put you in a three year prepay you should think real hard about going back to that person for a new loan.

As far as your loan goes, what you have to decide is how much your negative amortization could be in the next 18 months, how long you plan on staying int he property, and how much the saftey of today's rate is worth to you.
jimbo
Posted 12/7/2006 9:12 AM (#1341 - in reply to #1079)
Subject: RE: Pre-Payment penalty: How to know when it's worth paying
The only way you will know is if you find out how much the new payments would be at the lower rate. Take the current payment and subtract what the new payment would be. Then figure out how many monthly payments it would take to get your 10 grand back.

If the number of months is greater (which it probably is) than the 18 months you need to wait without paying the PPP, then you should wait.

If you dont understand this, I will try to explain a different way.
JohnI
Posted 12/8/2006 9:51 PM (#1347 - in reply to #1079)
Subject: RE: Pre-Payment penalty: How to know when it's worth paying
Posts: 92
Location: Las Vegas
Hello Eric,

Here are a couple of thoughts in regards to your question.

Your loan officer is completely speculating (guessing) that interest rates will be substantially higher 18 months from now. No one can acurately and truthfully tell you what rates will be we can only guess.

The way I would make a decision on whether to pay the prepayment penalty now or to wait is to do the following. How much interest would you pay on your existing loan over the next 18 months. (Call this A) Next, figure out how much interest you will pay at the new lower interest rate that you are being offered by your lender. (Call this B) Subtract A-B to determine your interest savings. If that amount is more than your prepayment penalty then it makes sense to do the refinance. Keep in mind that you want to be sure that you are not going to get out of the property or loan for the next 18 months. This scenario can be slightly adjusted to take into account what you think interest rates will be in the future versus where they are now, but that will only be a guess.

Lastly I would like to respond to some other peoples statements that since your Loan Officer gave you a prepayment penalty on the last loan that you should not use him/her again. I disagree with this statement entirely and believe that it is being said only to entice your business away. I have used prepayment penalties on my clients loans many times in the past. You Loan Officer only did you a diservice if they did not inform you of the prepayment penalty or if they did not pass on the benefit of using a prepayment penalty onto you. When dealing with my clients I like to discuss the benefit of a lower interest rate provided by the use of a prepayment penalty versus the risk of paying that penalty in the future. If a client tells me that they are going to be in a property for 10 years and will not be refinancing the loan, I have no problem recommending the use of a prepayment penalty for 1,3, or even 5 years in order to make thier loan cheaper for them. You really just want to have a prepayment penalty that is as long as possible without you running the risk of actually having to pay it.

Good luck with your decision.'

Best,

John I.
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