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Sidestep penalty for early mortgage payoff

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POSTED December 9, 2011 12:37 a.m.

DEAR BENNY: I was at the closing table for my condo purchase only to discover that there was a penalty for early payoff. I called the bank immediately and they told me to “take it or leave it.”
A great idea came immediately in my mind, and I went through with the closing. The bank explained to me that a percentage of the payoff amount is calculated as a penalty.
I sent (the bank) a payment for $5 less than the payoff amount.
After I made sure that my payment went through, I requested the payoff amount and the penalty. The penalty was, of course, calculated on the remaining amount of $5, and even if the penalty were 100 percent on the balance it would not be more than $5.
Maybe your readers will benefit from this story. I want to believe that banks still charge a percentage on the payoff amount and not a fixed fee. --Theo

DEAR THEO: You have raised an important issue, namely dealing with any prepayment penalty that a lender imposes.
Not every mortgage loan contains a prepayment penalty. You can find out if your loan has a penalty by reading the promissory note that you signed when you first obtained the loan. A typical language is: “I may make a full prepayment or partial prepayments without paying any prepayment charge.”
But some lenders will charge you for paying off the entire mortgage. In Theo’s case, his note said that he could make a partial prepayment without penalty but would be charged X percent to pay off the entire balance.
So, he creatively paid all but $5 -- i.e., a partial prepayment -- and then had to pay the penalty on the remaining $5.
That works for me, so long as that’s permitted in your legal documents.

DEAR BENNY: Are there standard practices that apply with a 50 percent owner of a home buying out the other owner? My sister and I have each inherited 50 percent of the family home, which is owned free and clear, and I would like to buy her share. I would like to live here and sell it or rent it out after a year or two.
We are trying to reach agreement on a purchase price. I feel the amount I should pay her is half the market value of the home minus 5-6 percent for what we would pay to an agent if we sold it to an outsider.
Also, before I decided to buy it, I put in a considerable amount ($30,000) to make the house, which was in poor condition, more salable (interior paint, refinishing a flooded basement, replacing 43-year-old windows), and she has also contributed toward needed repairs ($1,000). We’ve been advised that the house still needs several thousand dollars’ work (more painting, clearing out stuff) before it could be sold to an outside buyer.
Also, I returned to the area 15 months ago when our father passed away and have been living alone in the house without paying rent or utility bills.
Arriving at a “market value” is hard enough. Are there other considerations for what I should pay her? --Sandra

DEAR SANDRA: There really are no standard operating practices, but one thing is clear: You have to resolve this amicably. The alternative is that one of you will file what is known as a “partition lawsuit,” whereby the plaintiff asks the court to force a sale of the property.
To my knowledge, judges throughout this country have held that partition is a matter of right; where two or more people own property and one wants to stay and the other does not, the courts will direct that the property be sold.
I have personally represented a number of clients in your situation: Mom dies and leaves the property to her two children. One wants to stay and the other wants the cash. I tell all my clients that the only winners in a partition suit are the lawyers, the trustees (or real estate agents) who handle the sale, and the speculators who buy the property.
As indicated, there are no real standards by which to determine what you will have to pay to buy out your sister. I think it is reasonable for you to deduct the 5 percent or 6 percent that you would have to pay as a real estate commission, but I also think you should pay your sister something for the 15 months that you lived in the house without paying for rent or utilities.
As for the moneys that you each put into the house, if you can demonstrate that those funds in fact increased the value of the property, then each of you should get credit for the amount you spent. However, just because the house needs more work should not be a concern to your sister. Presumably, the condition of the house will be considered in the determination of its value.
To be on the safe side, I would suggest that you both agree to retain a professional appraiser to give you a market-value determination.

DEAR BENNY: My husband and I recently purchased a house and then refinanced it. We were able to get an excellent rate, but we had to answer a number of questions about his bankruptcy.
When he was 18 (10 years before we met), he co-signed on a friend’s auto loan. His friend defaulted and when my husband couldn’t make the payments he went bankrupt. He has learned from his mistake and since repaired his credit (I believe his score is close to 650 now). I thought that after seven years the bankruptcy would be cleared from his credit report, but now when we apply for a loan we have to explain why he went bankrupt.
Will this continue to haunt him/us forever or can he have this removed from his credit report so the next time we move we won’t have to re-explain his teenage mistakes? --Carrie

DEAR CARRIE: I was not sure of the answer, so I went to the FICO website. FICO is perhaps the main credit reporting company that lenders rely on when determining the creditworthiness of a potential borrower. According to FICO, “a bankruptcy is going to be factored into your FICO score until it falls off your credit report. It may take up to 10 years for this to happen, although the impact of the bankruptcy will lessen over time.”
I found it interesting, however, that FICO states that “filing a bankruptcy is generally better than having a foreclosure on your credit record. A person will often be able to rebuild credit and buy a house within two years after a bankruptcy. A repossession can do more damage to your credit.”
At first blush, I thought these were contradictory statements -- two years and 10 years. But a careful reading shows me that while bankruptcy is considered in determining credit standing, the mere fact that you filed (and were subsequently discharged) from bankruptcy does not mean that you are barred from buying a house for a full 10 years.
Clearly, if you have a good job, and have taken steps to boost your credit scores, mortgage lenders may be willing to make a loan to you in less than the full 10 years.
For readers who are considering filing for bankruptcy relief, here are some things FICO recommends you do to make sure your creditors are accurately reporting the bankruptcy filing:
•Check your credit report to ensure that accounts that were not part of the bankruptcy filing are not being reported with a bankruptcy status. You are entitled to get one free credit report once a year, from each of the three major credit reporting companies. They are: Equifax, TransUnion and Experian. You can find them at www.annualcreditreport.com. After you get your free credit report, you will also have the opportunity to get a copy of your FICO score for a nominal fee.
•Make sure your bankruptcy is removed as soon as it is eligible to be “purged” from your credit report. To answer your question, you have to determine the policies and procedures from each of the credit reporting companies. From my reading, each company has different policies regarding removing the reference.
•After a bankruptcy has been filed, the sooner you begin retaining or re-establishing good credit, the sooner you can expect your FICO score to rebound. A good practice is to obtain a credit card and continually make all of your payments on time. As time passes and the impact of the bankruptcy lessens, your credit will improve.
Above all, before you file for bankruptcy, make sure you discuss your specific situation with an experienced bankruptcy attorney.

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