Small Print in Loan Papers Returns to Haunt Home Buyers
When Dorothy and Robert Cambianica decided to refinance one of their mortgages they didn’t think much about prepayment penalties on their existing loan. What this retired couple discovered , however, was that to prepay their loan with California Federal, they have to pay a penalty of about $6,000.
Fifteen years ago, the Cambianicas didn’t pay much attention to a few lines in their loan agreement which say that the lender is entitled to six months worth of interest when more than 20% of the balance of a loan is prepaid. The couple’s $144,000 loan was fixed at 10 1/4%, so six months interest is now about equivalent to $6,000. That amount has to be added to the $118,000 that they still owe after 15 years of monthly mortgage payments.
“The way this was written up is very tricky,” complained Dorothy Cambianica. “You can’t believe they would pull something like that,” she said. “I wasn’t even aware of this.”
Refinancing will save the Cambianicas about $400 a month on their loan. Now, they have to decide whether to pay the penalty and go with the lender of their choice or whether to accept a new loan from CalFed, which has agreed to waive the prepayment penalty if the couple accepts a new 7 3/4% fixed-rate loan at CalFed.
You’ve probably guessed by now the moral of this story: Always read all of your loan documentation.
Borrowers should expect to see some sort of prepayment fee, especially on loans that have no upfront fees or points, said David Davison, regional loan center manager at California Federal in Warner Center. Loans that do have upfront fees usually have very minimal prepayment fees. But when a lender isn’t charging fees upfront, chances are there are fees lurking in the future. “The bank is trying to keep the yields similar on all of its various loans,” Davison said. “Pay me now or pay me later.”
On loans with no points and no fees, California Federal levies a charge on borrowers who want to prepay their loan during the first three years. For any prepayment of more than 20% of the outstanding loan balance, there’s a 3% penalty in the first year of the loan, 2% in the second year and 1% in the third year. Thereafter, there’s no penalty.
Indeed, some larger California banking institutions that advertise “no points, no fees” mortgages with extra low interest rates typically have some prepayment penalty clause if the loans are paid off within the first five years, said Ben Hunnicutt, a mortgage broker who runs Southland Financial Network in Woodland Hills.
In any case, the hefty six-month penalty in the Cambianicas’ loan isn’t part of new CalFed loans, Davison said. “There’s nothing like that now,” he said. “I haven’t heard of those loans in years.” CalFed also makes it a point now to call attention to prepayment fees several times in disclosure documents that are punctuated with capital letters and boldface type.
CalFed doesn’t use the words prepayment and penalty together, however. “Actually it’s called a prepayment privilege versus a prepayment penalty,” said Bob Clarke, senior vice president of the loan servicing division at California Federal. And, “we’re happy to waive the fees if the customer refinances with us,” he added. “We want to retain the customer.”
Great Western Bank has phased out its prepayment penalties, said Roger Cruzen, a vice president at Great Western Bank’s headquarters in Chatsworth. “It’s been so long that it’s pretty unlikely that we have borrowers with a prepayment penalty.” The most common of these penalties was about 1%, he said. All borrowers who want to pay off their loans do have to pay a $65 reconveyance fee, a $60 statement fee and a $5 recording fee. As for the penalties on older loans, Cruzen said, “we would generally not tend to waive any existing prepayment fees unless there has been a death in the family, the property has been damaged or the customer is refinancing with Great Western.”
“I feel sorry for people who are getting stuck with prepayment penalties,” said Donna Zimmerman, loan officer at Directors Mortgage Loan Corp., which has local offices in Van Nuys, Lancaster and Newhall. “Some of the paperwork is very ambiguous. You have to read the small print two or three times to get the message.”
Borrowers should know that “there’s no free lunch. There’s always a catch,” Zimmerman warned. “Ask lots of questions when you’re getting a loan. Don’t be shy to say you don’t understand something.” And, “don’t just sign the documents,” she insisted, “read them.”
