Many mortgage companies were hurt in 1993 by the surge in mortgage refinances.  Investors in mortgage securities and mortgage companies --- who hoped for years of interest payments on above-market rates --- ended up holding the bag due to unprecedented low interest rates.

The result ended in the "Discounted Prepayment Penalty Loan."  This loan is a classic free-enterprise solution based on quid pro quo --- give a lender a commitment that you will not refinance in three to five years and they will discount the loan by 1/4 point.  A 1/4 point on a $200,000, 7% loan would save $33.41 per month, which equals $400 per year, or several thousand dollars if you were to stay in your home seven to ten years.

Other discounted loans, with slight variations, are possible.  For example, a lender might defer all origination and closing fees --- which typically amount to several thousand dollars --- and forgive those entirely if the loan is not refinanced within five years.

How do you know if one of these loans is right for you when buying or refinancing your home? First, if you think interest rates will go down and you might refinance in the next three to five years, then don't risk the penalty to get a lower rate or fees now.  Second, if there is a strong chance you will pass the three-to-five year test, and you are comfortable with the risk, then why not not save money?

What ever you do, be sure you know exactly what you are signing up for.

All the Best To You!

David Mennen
Mortgage Loan Consultant/Owner
Tippecanoe Mortgage, Inc.
Direct: 765-448-1808
dmennen@tippecanoemortgage.com
http://www.davidmennen.com/

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