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Frequently Asked Questions (FAQs) on mortgages: Real Estate
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What is a prepayment penalty?
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What is the Right of Rescission and how does it protect me?
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What is a prepayment penalty?
Prepayment penalties are those charges which a lender imposes if you
wish to pay off your loan early. Typically home mortgages are written
for 15 or 30 year periods of time. While you may not hold the
mortgage for the full term, it is likely that you will probably stay
in the property longer than just one or two years.
For this reason, you should carefully read your note and mortgage
documents, in particular the prepayment penalty clause to understand
conditions which would apply to your loan. The loans which will carry
a prepayment penalty often penalize you only for paying off the loan
early in the first five years, and thereafter a graduating scale may
apply, or there may be no prepayment penalty at all after that
initial five year period.
To find out if your loan will have a prepayment penalty you should
first look at the type of loan you will be acquiring. Traditional
loans with fixed rates of interest usually do carry a prepayment
penalty while loans with an adjustable interest rate generally do not
carry the prepayment clause. There are some types of home loans which
re prohibited by law from charging prepayment penalties. These loans
include FHA and VA loans and federally chartered credit union loans.
Prepayment penalties are illegal in some states, so you may want to
check with your lender or attorney for the laws which apply for your
state.
To find out if your loan will have a prepayment penalty, ask your
lender when you first apply for your loan. Ask how much the
prepayment penalty will be if there is to be one, and for what period
of time it will apply.
Prepayment penalties can run between 2 to 4 percent of your loan
amount. While you may have no intention of selling your house in the
near future, and feel that a prepayment penalty would not really be
an issue for you, consider the possibility of your refinancing you
loan within the 2 to 5 year period of time. Interest rates may drop
and you may want to refinance your loan, in which case the prepayment
penalty could become an issue.
It is best to find out all the details about any prepayment penalty
which may apply to your loan before you sign your loan documents. Ask
questions, and if there is to be a penalty, ask if the lender would
consider waiving the prepayment penalty for you. You never know when
your circumstances may change and you may want to pay off or
refinance your existing mortgage.
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What is the Right of Rescission and how does it protect me?
The Right of Rescission is a protection given to borrowers under the
Truth in Lending Act. This right gives borrowers of certain types of
loans the opportunity to cancel their loan within 3 business days of
signing the loan documents and qualify to receive a full refund of
any monies paid. In your rush to refinance your home or to take out a
personal loan, using your home as collateral for the loan, you may
have second thoughts or want more time to shop for other financing
options. This act gives you extra time to carefully consider your new
loan. Sometimes called a "cooling off" period, it allows you those 3
extra days to be certain the loan is exactly what you expected.
In order for the loan to fall under the Right of Rescission protection
laws, the loan must be to refinance a loan on your home with a new
lender, or a refinance in which you will take cash out, over and
above paying off the old or previous mortgage. The right of
rescission does not apply in all cases where your home is used as
collateral for the loan. You will do not have the right of rescission
when: you apply for a loan to purchase or build your principal home;
you consolidate or refinance with the same lender who already holds
the mortgage on your home when no additional funds are borrowed, or
when a state agency is the creditor for your loan. If you are
increasing the size of your loan, refinancing with a new lender or
taking out a loan against your home, you can cancel the entire
transaction within the 3 day rescission period. Whether your home is a
condominium, a mobile home, or a house boat, as long as it is your
principal residence, the right of rescission will apply. The right
applies to certain installment loans, in which you borrow a fixed
amount and repay the debt on an agreed payment schedule as well as to
home equity credit lines.
You have the right to "rescind" or cancel your credit transaction
until midnight of the third business day after the loan documents are
signed. The mortgage or Deed of Trust will not be recorded until the
3 day waiting period is over. The first day is considered the day you
sign the credit contract. You will receive a Truth in Lending
disclosure form containing certain important disclosures about the
credit contract. These disclosures explain the key terms of the
credit being offered: the annual percentage rate; the finance charge;
the amount financed; the total of payments; and the payment schedule.
You will be given two copies of a notice explaining your right to
rescind. For rescission purposes, business days include Saturdays,
but not Sundays or legal public holidays.
During this waiting period, your lender will not take any action on
your transaction, nor will you receive the proceeds from the loan
until after the 3 day period has expired. If you do decide to
exercise your right of rescission and cancel the loan, you will be
required to notify the lender, in writing, that you are canceling the
contract. You may use the form provided by the lender, or by writing
a letter or telegram. Whichever form of written notice you use, make
sure it is delivered, mailed, or filed for telegraphic transmission
before midnight of the third business day. Keep in mind that to
qualify, you must follow the written procedures and not just notify
the lender by a telephone call or a visit to the lender.
Within 20 calendar days after receipt of the notice of rescission,
your lender will be required to return any money or property that was
given to anyone in connection with the loan and will be required to
take any action necessary to reflect the termination of the security
interest.
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