Posted by Bill Jacobsen on January 09, 2007 at 17:46:27:
Th prepayment language that you ran across is not unique in Texas. The lender has costs associated with the loan and will recoup them through the interest that you pay. If you prepay the loan the lender won’t make the same amount of profit.
What you have is called a soft-prepay. It means that you do not have to pay a penalty if you sell the house. Some loans penalize you even if you sell.
Bill
Prepayment Rider? - Posted by John
Posted by John on January 09, 2007 at 14:50:13:
I recently bought a couple of duplexes in Texas. I heard the law there is really weird. I can’t re-fi for x amount of years and what exactly is prepayment rider? Here is the fine print on the loan agreement.
“If within the first Five(5)years after the execution of this Note, I make any prepayments(s), the total of which exceeds twenty(20) percent of the original principal amount of this Note, I agree to pay a Prepayment Penalty in an amount equal to the payment of six(6) months’ advance interest on the amount by which the total of my prepayment(s) during the 12-month period immediately preceding the date of the prepayment exceeds twenty(20) percent of the original principal amount of this Note. The Note Holder will waive this penalty if I furnish the Note Holder with documentation, in the manner and at the time resonably specified by the Note Holder, indentifying the prepayment as being in connection with the sales of the property to an unrelated third party”.
Any feedback would greatly appreciated!
JV.
Re: Prepayment Rider? - Posted by Anonymous
Posted by Anonymous on October 12, 2007 at 13:20:28:
Hi. This is not a professional legal opinion, I am just a guy who tries to carefully read and understand prepayment penalty clauses. What I have to say may help you if you have not made any large prepayments and want to refinance, but you may have not have an easy time getting people to really understand this.
In your case, the clause says that if you make prepayments during the first 5 years, you agree to pay a prepayment penalty in the amount of six months’ advance interest on the amount by which “SOMETHING” exceeds 20% of the original principal.
OK. Now consider very carefully what “SOMETHING” is:
the total of my prepayment(s)
during the twelve (12) month period
IMMEDIATELY PRECEDING the date of the prepayment
Suppose you have a history of no prepayments, or “small” prepayments, and then do a total payoff (i.e. refinance). Say the total payoff is made on, for the sake of argument, 10-August-2007. The twelve month period IMMEDIATELY PRECEDING 10-August-2007 is the period beginning 10-August-2006 and ending 09-August-2007. So we need to total the prepayments made from 10-August-2006 thru 09-August-2007 and use this in the penalty calculation. Notice that is is an absurdity to include the prepayment made on 10-August-2007 since the prepayment made on 10-August-2007 is not a prepayment made in the period 10-August-2006 thru 09-August-2007. If there are no prepayments, or only “small” prepayments during the twelve month period then the penalty calculation results in a ZERO amount.
Don’t believe me? Then explain how a prepayment made on 10-August-2007 is a prepayment made in the immediately preceding twelve month period from 10-August-2006 thru 09-August-2007. It doesn’t made sense. Try and find wording that says to include the 10-August-2007 prepayment in the twelve month total. There ARE prepayment penalty clauses that say “SOMETHING” is:
the amount of any prepayment that, when added to
all other amounts prepaid
during the 12 month period
immediately preceding the date of the prepayment
so, in this case the most recent prepayment is included in the twelve month total, but this is NOT the wording in YOUR specific prepayment clause (lucky for you), the most recent prepayment is NOT part of the total used to compute the penalty amount in your case, UNLESS “immediately preceding” instead actually, legally means “immediately preceding and including” or “ending with and including” or “up to and including”.
Again, just try to rationalize how a prepayment made on 10-August-2007 is one of the prepayments made during the period 10-August-2006 through 09-August-2007. It doesn’t make sense. It would mean that 10-August-2007 is a date immediately preceding 10-August-2007 and that an event that occurred on 10-August-2007 is actually and event that occurred earlier than 10-August-2007.
Your clause DOES provide the lender with a potential non-zero prepayment penalty, depending on the timings and amounts of any prepayments, but the penalty is ZERO in the event of a total payoff with no other prepayments or only “small” prepayments.
You probably WILL have quite a time convincing the lender of the above interpretation. I believe it is the correct interpretation. You may have to end up litigating. If you prevail at trial you should be able to recover your cost of litigation plus the amount of any overpayment you made on an incorrectly calculated prepayment penalty. You probably will not be able to recover any other damages unless you can clearly demonstrate you suffered actual damages as a direct result of the lender incorrectly calculating the prepayment penalty (maybe you can get some interest on any overpayment amount that sat in the lender’s wallet).
Another alternative might be to find out if the lender might waive the prepayment penalty if you refinance with them. If the lender does not agree with the above analysis, though, it is highly likely to be a lender not worth doing repeat business with since they cannot understand the customary meaning of “immediately preceding” and therefore aren’t qualified to service any contract you have with them.
Good Luck !!! Please post a follow up if you pursue the above.