The XBroker: October 2006

Pre-Payment Penalty Ponderings

financial-handcuffs.jpg    Pre-Payment Penalties (PPP) are often used as a tool by mortgage broker/bankers to increase the amount of YSP a Lender will allow them to charge. The theory behind this is that Lenders don’t mind paying larger amounts of YSP if they can guarantee a recoup of some of the cost via a PPP, should the loan be paid off/refinanced ‘early’.

For example, a loan without a PPP may only allow a broker/banker to charge up to say, 1% in YSP. By adding a PPP the Lender will up the broker YSP ceiling allowance to say, 2.5%.

There are a few variables to PPP’s as well. Term..1 year, 2 year, 3 year…and Type..Hard or Soft.

A 1 year hard prepay at 1% indicates that if the loan is paid off/refinanced at anytime within 12 months, the Lender may/will charge (typically) 1% of the original loan amount. After the 12th month the PPP goes away. The PPP amount is the same if the loan is paid off in month 1 or month 12.
A 3 year soft PPP at 2% indicates that if the loan is paid off/refinanced at anytime within 36 months, the Lender may/will charge a prorated amount depending on the age of the loan. For example:

The original loan amount is $100K

The 3-Yr soft PPP is 2%, which equals $2000.

$2000 divided by 36 (months) = $55.55/month.
As each month passes, the (soft) PPP dollar amount decreases by $55.55.
Loan is paid off/refinanced in month 12, leaving 24 months worth of PPP left, or $55.55 x 24 = $1333.33.

If this was a Hard PPP, the dollar amount would remain $2000, regardless if the loan was paid off in month 2 or month 35.

PPP’s, hard or soft, are designed to afford a consumer a lower interest rate in exchange for the ‘extened commitment/early payoff insurance policy’. Unfortunately, many bankers/brokers use them to increase their commissions, while locking a consumer into a more expensive loan.

Comment balloon 0 commentsJeff Corbett • October 28 2006 04:08PM
Pre-Payment Penalty Ponderings
share
Pre-Payment Penalties (PPP) are often used as a tool by mortgage broker/bankers to increase the amount of YSP a Lender will allow them to charge. The theory behind this is that Lenders don’t mind paying larger amounts of YSP if they can… more
10 X-Rated Resources
share
Mash-Up has to be the Web 2. 0 “Word of the Year. ” For those of you not in the know, a mash-up is the combination of two existing webservices to create something new, wherein the whole is greater than the sum of its parts. Here are… more
Swindlers List
share
WARNING: What you are about to read are 100% factual accounts of grievous broker misconduct. The rules regarding YSP and disclosure are clear, yet some broker/bankers continue to operate as if they’re above the law. If you’ve never seen this… more
Broken ARM? Should've watched your Step…
share
There has been quite a bit of material written about the sinister mortgage programs called Option ARM's, or fixed payment mortgages. Dangerous, Predatory, Deceptive, ______ fill in the blank with your "watch out! " comment of choice. The… more
"The United States of America vs. The National Association of…
share
Couldn’t refuse the title. “DOJ Intent Leaks Ahead Of Meeting With NAR, DOJ Denies Leak” from The Realty Times reports. Things are not looking good when the Government is threatening your organization with an anti-trust suit. I don’t care if you’re… more