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Pre-payments to Cut Penalties

Mortgage-PenaltiesNothing makes a mortgagor curse his or her lender’s name faster than a big fat pre-payment penalty.

One way to lessen the penalty sting is to make a lump-sum pre-payment before discharging your mortgage. That lowers the balance upon which the penalty is calculated.

The problem is, people often don’t have wads of cash floating around to make a pre-payment.

One solution is to borrow funds for a short period—be it from family, an unsecured line of credit (ULOC), or wherever.

This is where banks have an advantage over many brokers. Banks can often arrange unsecured credit lines for mortgage customers whereas most brokers don’t.

That may be changing, however. We hear of two banks working on distributing unsecured credit lines through the broker channel. That will be a win for brokers and save them from having to outsource ULOCs to bank branches (who have a funny way of competing with brokers for mortgage business).

On a separate note, last Friday we came across a new pre-payment loan service. It’s a start-up company aimed at lending you money to make a pre-payment. In return, it takes a portion of your penalty savings. We’ve seen one small outfit offering this kind of service before, but this new firm should make the pre-payment loan concept more mainstream.

We’ll report on these new offerings in detail once the info has been made public…

Sidebar:  If you’re planning on making a pre-payment to lower your penalty, ask your lender how far ahead you need to do it. At a minimum, you’ll want the lender to record the pre-payment before you request a discharge statement.

Also keep in mind: In some cases, lenders don’t allow a pre-payment to count towards penalty reduction if the pre-payment occurs within 30 days of discharge.

Rob McLister, CMT