 Mortgage
prepayment penalty snarls refi
|  Dear
Dr. Don,
I applied and was approved for a cash-out mortgage refinancing. The
loan amount was for $260,000, which I expected to be enough to pay
off the balance on my existing first mortgage, a home equity line
of credit, a credit card balance and the loan's closing costs.
The lender provided me with
a good faith estimate for estimated settlement charges of $3,617. On the
day of closing, the closing attorney's office called to tell me that I would need
to bring a check to the closing for $5,029. After making some calls, I learned
from an administrator in the closing attorney's office that my existing first
mortgage had a prepayment penalty. I didn't close on the new
loan. The refinancing didn't make sense with the prepayment penalty. I feel that
the refinancing lender had an obligation to tell me about the penalty. When
I spoke to a vice president at the bank about this, he told me that the bank I
currently have my first mortgage from is known for charging very high prepayment
penalty fees. I told him that he should have informed me about this point before
proceeding with any appraisal or closing. To add insult to injury, I get a
bill from the attorney's office for a total of $916.50, which states I need to
pay for 2.5 hours of service at $225/hour and two other fees, which they stated
as $354. Can I fight this bill from the attorney's office?
I really
feel the bank was negligent in this entire process and since they knew that the
bank I am using charged large prepayment penalties, then they should have known
what the actual payoff was before telling me the day of the closing that I would
need to provide a check for over $5,000. I feel the bank should pay the legal
bill since they were negligent in the way they handled this entire process from
the very beginning. Thank you.
-- Nancy Noloan
 Dear
Nancy,
I'm not with you on this one. A good
faith estimate, or GFE, isn't designed to show you the prepayment
penalties on the existing loan; rather, it discloses any prepayment
penalties on the new loan. It was your responsibility to know
whether the existing mortgage had a prepayment penalty. The
closing costs on a GFE are just estimates and are represented as
such. Allocating loan proceeds with GFEs is never a good idea.
It's the HUD-1
Settlement Statement, not the GFE, that shows the actual settlement costs of the
loan transaction.
Under the Real Estate Settlement Procedures Act, or
RESPA, you had the right to request the HUD-1 or the HUD-1A one
day before settlement. Here's what the HUD
Web site says about that statement:
"The
HUD-1 Settlement Statement is a standard form that clearly shows
all charges imposed on borrowers and sellers in connection with the settlement.
RESPA allows the borrower to request to see the HUD-1 Settlement Statement one
day before the actual settlement. The settlement agent must then provide the borrowers
with a completed HUD-1 Settlement Statement based on information known to the
agent at that time."
There's been a lot of discussion surrounding reforming
RESPA, in part to get this information in the hands of the borrower
early enough for them to use it in decision making, but future reform
doesn't do anything for your current situation.
Not paying the attorney isn't really an option. Do
you want a lien place on your home for $1,000 in unpaid attorney's
fees? You could try to talk the lender into paying the fee or the
lawyer into reducing the fee, but I don't know a reason they would
be obligated to do so.
Determining whether there is a prepayment
penalty should be one of the first things a homeowner considers
in the decision to refinance. There are people who knowingly
pay a prepayment penalty to refinance a mortgage -- usually because
their credit score has improved or they like the rate on the new
mortgage enough to pay a penalty to refinance. It wasn't the
refinancing lender's responsibility to know your mind in the decision
to refinance.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
| 
