Posted by Susan Fischer on 12/29/11 10:12pm
Msg #407854

TIL disclosure question: Re: Prepayment -

"If you pay off early, you

__ May __ will not have to pay a penalty.

__ May __ will not be entitled to a refund of part of the finance charge.

The question is, if the loan is pre-paid, then the amount in the TIL "Finance Charge" (the dollar amount the credit will cost you.) is forfeited as a sort of "penalty," correct?

Thanks in advance to those in the know.

Reply by Pat/IL on 12/30/11 1:20am
Msg #407860

Incorrect. If that were the case, it would be an awfully stiff penalty. Any pre-payment penalty, or absence thereof, will be spelled out on the note or on an addendum to the note.

Reply by MichaelB/IL on 12/30/11 1:59am
Msg #407862

Interest already paid of course is not refundable, and this is why interest is always collected in arrears, but I believe this is more in regards to pre-paid finance charges, of which FHA UFMIP (Up Front Mortgage Insurance Premium). This is a pre-paid finance charge, and portions may be refundable.

Reply by ReneeK_MI on 12/30/11 5:28am
Msg #407864

As Pat explained, the Finance Charge is the dollar amount of all interest, pre-paid finance charges and any mtg ins (if applicable) over the life of the loan.

Any pre-payment penalty is spelled out in the Note (must be, by law), usually at the bottom of the first page.

The gray area is with FHA loans. FHA does not allow any "pre-payment penalty", per se - BUT does allow interest to be collected to the next due date (and calculated on the unpaid balance, of course), regardless of the date any partial or full pre-payment is received.

For example: Your monthly payment is due on the 1st, and you pay an extra $1000 in the middle of the month, say the 15th. On the next due date (1st of the next month), the interest will be calculated on the unpaid balance - as IF you had NOT paid down the extra $1000. Once that interest is calculated & amortized into the loan balance, THEN the extra $1,000 will be applied to the balance.

Example 2 - Your payment is due on the 1st, you refinance and close on the 15th. The payoff amount on the existing FHA will (likely, as in pretty much always, although it IS lender discretion) include the per diem interest all the way through to the 1st of the next month.

In essence, you end up paying interest on money you are no longer 'borrowing' - which is the gray area. Is that a penalty, then?

Almost all lenders opt to show it as "may" be. The Fed Reserve Board said they don't have to, but ... change is not easy, and who wants to sign up to test things 'in the lab' (court). You'll often see a more detailed 'blurb' about this right on the TIL's for FHA loans.

PPP's have become a rare animal on other loan products, and some states have outlawed them on certain products - can still see them on sub-prime, some ARMS, & 'alternative' products like the Interest Only.

As for the refund of finance charges - as Michael explained, on the FHA's if you streamline into another FHA w/in a certain period (few years), you may get a partial refund of the UFMIP.

Reply by Larry/IL on 12/30/11 8:51am
Msg #407883

Keep in Mind FHAs & VAs work very similar n/m

Reply by Larry/IL on 12/30/11 8:55am
Msg #407884

ALSO

This area sometimes has the that you will pay if paying off early. What they usually are referencing is that borrowers will still be responsible for any interest through the end of that month in which they pay off early.

Reply by ReneeK_MI on 12/30/11 10:05am
Msg #407895

I could be wrong, no doubt, but ...

I don't find anything different than what I used to think I knew? VA Funding Fee isn't refundable like the FHA UPMIP can be (in certain situations), and the VA collects per diem interest the same as Conventional loans - not interest through to the next due date, like FHA.

Reply by ReneeK_MI on 12/30/11 10:15am
Msg #407897

I should re-word that ...

I said "... the VA collects per diem interest ..."

The VA isn't collecting it, the LENDER is collecting it, just to be concise. =)

Reply by Susan Fischer on 12/30/11 10:39am
Msg #407901

Should have added that the "will not be entitled..." box is

checked, and the phrase I omitted, because it is as blank as the "may" boxes: "If you prepay your loan other than on the regular installment date you may be assessed interest charges until the end of the month."

I'm really sorry for that, folks. Also, not an FHA or VA loan.

If the "will not" boxes ares checked, and the "may" are not, the way Dad's engineering mind works, and because the TIL specifies the Amount Financed ($34,500,) if he won the lottery tomorrow and wanted to pay off this loan, it would still cost $34.5K for the credit.

Otherwise, why isn't the "may" box checked?

Reply by ReneeK_MI on 12/30/11 11:10am
Msg #407903

Then I need to start over! =)

Here's a nicely worded brochure that MAY/MAY NOT work with the engineering mind:

http://www.in.gov/dfi/qa.pdf

For the details - in other words, if it's a rainy day and you're stuck trying to explain what teensy gray areas an engineering mind MAY/MAY NOT find within the brochure ... there's always Reg Z. =)

Reply by Susan Fischer on 12/30/11 11:36am
Msg #407907

Perfect, Renee, thanks. And thanks to all who

responded.

Sorry for the lousy first post, everyone.

Engineer now happy, especially since I threatened to print off Reg Z...zzzzzzzzzzzz...

My old tried and true blurb about the Finance Charge on the TIL/disclosure being 'estimates' now makes sense to him.

Another rainy day, another problem solved.

Love all of the fine minds here, the helpful folks who are so generous input.

Happy New Year, all!

Reply by Calnotary on 12/30/11 7:35pm
Msg #407937

Perfect, Renee, thanks.

MY STATEMENT SAYS THAT IF I PAY THE LOAN
OFF EARLY, I WILL NOT BE ENTITLED TO A
REFUND OF PART OF THE FINANCE CHARGE.
WHAT DOES THIS MEAN?
This means that you will be charged interest for the period of
time in which you used the money loaned to you. Your
PREPAID finance charges are generally not refundable, nor is
any interest which has already been paid. If you pay the loan off
early, you should not have to pay the full amount of the "Finance
Charges" shown on the disclosure. This charge represents an
estimate of the full amount the loan would cost you if the
minimum required payments were made each mo nth through
the life of the loan. If you have mortgage insurance you may be
entitled to a refund of any unused portion of mortgage insurance
paid at time the loan closed.

Reply by Buddy Young on 12/30/11 9:49pm
Msg #407945

Re: Perfect, calnotary n/m

Reply by Cheryl Dingwell-Keckritz on 12/31/11 1:53pm
Msg #407968

Incorrect. The amount in the TIL "Finance Charge" box is defined here by the federal government as the total amount of interest that would be paid over the life of the loan if you "had" the loan that long. Defined in the TIL Act.

The finance charge at the bottom of the form under "Prepayment" is talking about the "finance charges i.e. closing costs" paid at the closing. In other words, if you won the lottery the day after the loan closing and paidoff your loan, you would not be entitled to a refund of any of the closing costs paid at the closing.

I know, makes about as much sense as when I read it in 1974 when it first came out!

Reply by Susan Fischer on 12/31/11 2:20pm
Msg #407972

Many thanks to all responders. n/m