PrePayment Penalties are Fascist
I think they are, or are they communist? I don't think they are communist. Anyway. They are not good, in my mind.
So you get a loan. You're payments are due on the 1st of every month without fail. Now, the conventional wisdom of the day says that if you have a 30 year loan, if you make one extra payment a year (13 instead of 12) you can pay that same loan off in like 22 years instead of 30. But - some evil banks have these things called PrePayment penalties. If you make a principle only payment or a payment out of order, so two in one month, you'll be charged a prepayment penalty. And it's not a small number.
Now, our loan does not have these. It was a condition of mine.
Anyway - Neal Boortz says this:
But the part of his thing I don't like ... comparing it to renters and their penalties for breaking a lease early. It's just not the same thing. The home owner is ultimately responsible for getting the house ready to rent or sell. And the bank gets paid for all of that paperwork processing at the time of closing, with every house that is bought and sold. Why should the owner have to pay again for the bank to process paperwork for someone else? When ultimately, that someone else will be charged closing costs to pay for that paperwork too?
Plus, who knows if that same bank will be asked to put forth a loan on the same property? Why would you assume that? And the bank is not responsible for selling that house, the owner is. The bank is not a Real Estate agent.
Sorry Neal ... don't like. Prepayment penalties are bogus. And they are a fee that banks charge to people that don't know they have options, or who perhaps - due to their credit rating - don't have options. A greedy fee.
So you get a loan. You're payments are due on the 1st of every month without fail. Now, the conventional wisdom of the day says that if you have a 30 year loan, if you make one extra payment a year (13 instead of 12) you can pay that same loan off in like 22 years instead of 30. But - some evil banks have these things called PrePayment penalties. If you make a principle only payment or a payment out of order, so two in one month, you'll be charged a prepayment penalty. And it's not a small number.
Now, our loan does not have these. It was a condition of mine.
Anyway - Neal Boortz says this:
Web Guy forwarded a message to me today from a listener who wanted to know why I would ever support the idea of a prepayment penalty on a loan. I thought I wouldNormally I'm all about it. But prepayment penalties just seem gratuitious, and lots of banks don't have them. So banks that were offering loans to these bad credit holders, they charge them. Just further limiting people with bad credit. However, if they had good credit, they can get loans from more places, and probably a bank that does not charge prepayment penalties.
share my response with you.
Some people rent apartments. The person renting the apartment signs a lease. It may be a 12 month lease. If that person moves out early they may forfeit their deposit at best and be sued for the remainder of the lease at worst. Why? Because it costs the landlord money to go in and prepare the apartment for the next renter. The lender has to also run a credit check on the new renter and get a new set of lease documents prepared. This all costs money. In addition, the landlord may have an empty apartment for a month or so while waiting for the new renter to move in. The costs of getting the apartment ready for a new tenant and the vacancy period between leases is factored into the cost of 12-month lease. If the tenant bails early the landlord loses money.
Some people rent money. The person renting the money signs a loan agreement. It may be a 15 year loan. If the person pays the loan early they may have to pay a prepayment penalty. Why? Because it costs the lender money to cancel one set of loan documents, find a new borrower (advertising), run a credit check on a new borrow and then get the documents ready for the next loan. Plus .. that money will sit idle in the lender's account waiting to be sent out there again with a new loan to earn interest for the lender. The costs of transitioning from one borrow to another is covered in the cost of the 15 year loan. If the borrow pays off early those costs have to be incurred sooner than expected -- and before the lender has made its full profit from the loan.
Renters pay to get out of a lease early. It is perfectly fair for a borrower to do the same.
Let the free market rule.
But the part of his thing I don't like ... comparing it to renters and their penalties for breaking a lease early. It's just not the same thing. The home owner is ultimately responsible for getting the house ready to rent or sell. And the bank gets paid for all of that paperwork processing at the time of closing, with every house that is bought and sold. Why should the owner have to pay again for the bank to process paperwork for someone else? When ultimately, that someone else will be charged closing costs to pay for that paperwork too?
Plus, who knows if that same bank will be asked to put forth a loan on the same property? Why would you assume that? And the bank is not responsible for selling that house, the owner is. The bank is not a Real Estate agent.
Sorry Neal ... don't like. Prepayment penalties are bogus. And they are a fee that banks charge to people that don't know they have options, or who perhaps - due to their credit rating - don't have options. A greedy fee.
Comments