Cancelling a pre-payment penalty

Let’s say that a person wanted to refinance his home from a subprime mortgage to a fixed-normal mortgage…

Now, his original mortgage has a prepayment penalty which would make the refinancing impractical. What about this type of phone call to the original mortgage holder:

Borrower: I would like you to cancel any prepayment penalties I have as I wish to refinance.

Lender: No.

Borrower: Okay, well, in a few months you will have to foreclose on me, as I cannot meet your monthly payments. If you would cancel my prepayment penalties now, then I could refinance, you would get out of this loan, and have all of your money back instead of taking a loss in this market.

Lender: You’ve convinced me. That’s a deal.

A realistic conversation, or pipedream?

We would be happy to discuss a modification of your payment schedule with you but we will not waive the prepayment clause.

I can anticipate that, but why?

If I can’t make the original payment and you are going to get hard dick or bubblegum (and I don’t have bubblegum) when you foreclose, then

Why wouldn’t you accept a refinance with another company where you get my loan paid off (with all interest already paid)? I would jump at that if I were a creditor…

You’ve been paying a lower interest rate that you should have. The bank agreed to this in exchange for you paying a higher interest later. If you pay off the loan before the higher interest kicks in they lose money. Of course they would like to avoid foreclosure, but they still want to make money. They will probably work with you on a payment schedule, but it would just result in you paying more interest in hte long run.

If I were a typical hard-assed mortgage officer I might bet that you’re bluffing – if you’re so broke that you can’t afford the mortgage you have, you probably can’t get a mortgage from a brand new lender. However, if I refinance you, I’ll pick up at least something with the new terms that will pay me back some of my anticipated profit from your original mortgage.

Pretty much the same thing treis said.

Our HELOCs that we offer at my work have PPP. The reason is that we pay all of the closing costs on those, if someone closes the HELOC out early, we lose the money that we invested to get it opened in the first place. (this doesn’t stop someone from paying it down to $0.00 though.)

Most of the subprime loans have them for the exact reason described above. The teaser rate wasn’t really making them money, but the rate on the adjustment is going to be making a basket of cash for them. In this market though, you may see them waive that. It’s more likely if you have a relationship with them in other areas.

The other thing to try, if they tell you “no” right away and won’t budge, is to request to speak to a work out specialist (or Loan Assistance Dept. or Special Assets Dept. whatever they call it.) Tell they guy you’re not going to be able to make the payments when it adjusts, you have a lender who will refi it and need to have the PPP waived. They may offer either to waive it or to refi you into a better rate. Could go either way… or they may tell you NO!

Studiously ignoring the giant moral elephant in the room, maybe they think they’re calling your bluff, and that you really, really will do what it takes to keep making your payments, rather than having the sheriff evict you? IME a lot of people can find a way to make the payments rather than live out of their car, when it comes down to it, and the banks likely have an idea of the odds.

How much are pre-payment penalties on subprimes? My (prime) second mortgage carries only a $300 pre-payment penalty, and only for the first three years, and only if I don’t refinance with that bank. Is it really that high that re-financing becomes impossible?

Usually one or two percent. Sometimes more. Depends on the state.

To the OP:

They might let you talk to someone in loss mitigation or workouts. But those people aren’t just going to take your word that you won’t pay unless they drop the prepayment penalty. They’ll ask a lot of questions about your finances (in order to determine whether you aren’t bsing them), and if they offer you anything, it’ll probably be a modification of the terms of your current loan–not the opportunity to take it elsewhere.

If lenders capitulated every time a borrower threatened bankruptcy or default, few loans would be paid as agreed.

Of course, there’s no downside in asking.

Some good resources on prepayment penalties: