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hi,
is it legal for banks to give loans with conditions in there mandating that all of the interest be paid back in full regardless of when the principle is paid in full? (ie. on a 250k mortage that is tied to 200k worth of interest, it doesn't matter if you pay the 250k in 30 years like you're supposed to, or if you pay a week after getting the loan....you owe them 200k in interest)
i know this is done in many other countries....but is this legal here in the US?
I have worked in the A, Alt-A, and Sub-prime mortgage industry for many years. Here in America, this is simply called a balloon loan. These are very popular in Europe and Asia.
The primary advantage is the lower interest rates. The best rates I am currently seeing here in the U.S. is 3.75% on a 30 yr mortgage.
As for mandating conditions - understand Mortgage banks are governed by the Treasury Dept, and do not full under the Judicial branch of the government. The rules are determined by the terms when you sign your note. When you have the loan, the Lender and you are bound by the agreed upon rules.
As for paying early - in your paperwork, there is a clause about any prepayment penalties.
Doesn't sound like a balloon to me, more like a prepayment penalty if you pay it off early. But no, in the US you only pay interest on the principal used for the amount of time used. But other parts of the world have generational loans, that can span over generations, where the debt is paid by the initial debtor's children and grandchildren.
Doesn't sound like a balloon to me, more like a prepayment penalty if you pay it off early. But no, in the US you only pay interest on the principal used for the amount of time used. But other parts of the world have generational loans, that can span over generations, where the debt is paid by the initial debtor's children and grandchildren.
this is not a pre-payment penalty loan since it's not really a penalty....it's the whole freaking interest amount! sounds much worse than a penalty...
also, i have at least one friend who was unfortunate enough to be stuck with this type of loan......so he has no incentive to pay early.......
i just don't know what it's called or if it is legal.
SmartMoney / Shane - (No pung en-tended) come on guys you are the mortgage professionals here. It surprises me - you guys don't know about, or have worked with these types of loans?
From the class Mortgage 101
A balloon loan (also referred to as a "reset mortgage") starts with a payment of interest only for a certain number of years. Unlike traditional interest only mortgages - where you are paying for 3,5,7,10 years, then future payments include principle. A balloon loan has a lump sum payment due - this is when a loan is not amortized.
There are more commercial balloon loans than consumer balloon loans. The most popular terms are 5/25 Balloon, and 7/23 Balloon (there are shorter/longer terms available).
The problem with balloon loans is the term. Obviously, that's a large sum of money to pay at one time! Typically, people refinanced their balloon loans prior to recasting.
Balloon loans with refinancing option allow borrowers to convert the mortgage at the end of the balloon period to a fixed rate loan P/I loan - if certain conditions are met. The problem today is the CLTV/LTV is preventing refinancing.
Two weeks ago had a balloon modification completed with Wells Fargo. A modification from "Hell" got denied 8 times, went up the ladder to one of the vice presidents to get it approved. Resulting in conversion to a 40 year at 2% fixed for life of the loan, with 58,000k reduced off principle.
Still, 2011 will show the highest foreclosure rates in history, . If there is any good news for 2011, it is in a moderate increase in purchase activity expected in the second and third quarters. Higher rates, tight credit, oversupply of bank-owned properties and continued unemployment will temper this activity, though. The extension of the Bush tax cuts may help purchase activity. This is going to keep me in the modification business till 2018.
I know what a balloon mortgage is... you pay on it for 3, 5, 7, 10, etc. years... and then the PRINCIPAL balance is owed at that point... NOT the interest that you would have paid if the loan continued for the remainder of the amortized term.
The OP is saying that the mortgage their friend has requires ALL interest to be paid that would have normally been collected if the mortgage was paid over it's full term, and not prepaid.
So basically the mortgage was $100k 30-year fixed at a 6% rate (hypothetical, as I don't know the actual terms), and after they got the mortgage, if they decide to pay it off on day 2 of the mortgage... instead of just $100k + 2 days of interest being owed, it'd be $100k + 30 years of interest ($100k principal + $115,838 in interest).
That is not a balloon mortgage in the traditional sense, that is getting bent over.
...So basically the mortgage was $100k 30-year fixed at a 6% rate (hypothetical, as I don't know the actual terms), and after they got the mortgage,
if they decide to pay it off on day 2 of the mortgage... instead of just $100k + 2 days of interest being owed,
it'd be $100k + 30 years of interest ($100k principal + $115,838 in interest).
That is not a balloon mortgage in the traditional sense, that is getting bent over.
The situation you are explaining, whatever is stated on the loan note the borrower signed at closing, are the conditions. Last year took a modification - a guy in Georgia had a mortgage at 48%. In our business we see everything from "A" Lender, Sub-prime, Predatory, to Private Mortgage defaults.
The borrower would be atotal idiotor had a gun to their head by signing documentation agreeing to these terms - 100% interest of the lifetime of the loan if the loan is paid in full 2 days after closing... lol..lol..
At the closing on the HUD statement - 30/60 days not 2 days, of prepaid interest is listed as included in the closing costs. That is for the interest being charged on the loan until the first payment is scheduled. On "A" paper loans - have seen notes where there was a prepay penalty of up to 25% of the first years interest if a loan was paid off in the first few years. When I was a L/O - wrote many loans absorbing prepay penalties.
If this is a refinance - top propriety is to rescind in the three day window. Purchase's ..........your right hypothetically we don't know the actual terms of the loan.
Not going against you bro. You do a good posting here!!!
Happy New Year from the East Coast....
Last edited by Modification Specialist; 12-30-2010 at 06:26 PM..
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