Mortgage Refinance Logistics
Written by Daphne Tai   


 
Prepayment Penalties

Since a refinance involves paying off the original loan and starting a new one, you usually need to deal with a “prepayment penalty.” Because you “pay off” the old loan, lenders write prepayment penalties into mortgage contracts to compensate for the prepayment risks.

The following is an example of Wells Fargo’s policy for prepayment fees:

“Our prepayment fee periods are limited to the lesser of 3 years or the fixed term of an adjustable rate loan. We cap our prepayment fee amounts at 3% of the loan amount in year one of the loan, 2% of the loan amount in year two, and 1% of the loan amount in year three. We also advise consumers who apply for loans with prepayment fees of the availability of loans without prepayment fees and the associated impact on the interest rate. After 12 months from closing, we will waive our prepayment fees if we refinance a loan through our retail channels.”


Legal Requirements

Besides the responsibility of a prepayment penalty, there are certain forms and documents that the bank must give you. They usually apply to mortgage and loan refinancing, just as they did when the mortgage loan originated. The two main legal regulations that impose these requirements are the Right of Rescission and Real Estate Settlement Procedures Act (RESPA).


Right of Rescission

As part of the Truth in Lending Act, the 3-day Right of Rescission is a legal document that the bank gives to the borrower on the day that close the loan refinancing that involves cash out. The main reason that refinancing involves cash out is that many homeowners are using loan refinancing as a way to consolidate their other debts or loans and combine them into one mortgage payment. So within these 3 days, borrowers have the rights to change their money or cancel the deal.


RESPA

Real Estate Settlement Procedures Act (RESPA) is a group of forms that must be given to borrowers when they fill out a loan application for a loan refinancing. The RESPA documents, which are also known as Early Disclosure include a Good Faith Estimate, which gives the borrowers an idea of what kind of fees or charges they will be paying. Remember: the Good Faith Estimate is only an Estimate! The final closing costs may be different. The RESPA also includes a Mortgage Servicing Disclosure Statement which lets the borrowers know if they will be servicing the loan or transferring it to another lender.

 

 
Last Updated on Sunday, 27 March 2011 00:18