Home refinance may come with nasty curve

Some Valley homeowners trying to refinance out of troublesome loans in recent months have met with a nasty surprise. It’s called a prepayment penalty, and many people who have one don’t realize it.

A prepayment penalty requires a borrower to pay a fee — frequently totaling thousands of dollars — if the loan is paid off early.

Home buyers who agree to a penalty can get a lower interest rate, though not always, said Greg Geenen, vice president of the Arizona Mortgage Lenders Association.

The problem is some unscrupulous loan officers slip in the penalty without telling the client, who fails to recognize it in the somewhat cryptic loan documents, Geenen said.

“People get all excited at the signing and just start signing everything,” he said. “It’s a tense moment.”

It’s becoming a more prominent issue now that the housing market has slowed.

In the past, borrowers who needed to move early had garnered more than enough home equity to pay off a penalty.

Now, dropping values mean some people already owe more than their houses are worth, Mesa loan officer Shailesh Ghimire said. And adding a penalty on top of that can make or break a deal, he said.

A year ago, an East Valley couple came to Ghimire hoping to refinance and give themselves some breathing room.

Then they learned they had a $9,000 prepayment penalty on their roughly $300,000 loan. Adding that to their new loan balance meant their payments would have risen, Ghimire said. So the pair decided to continue stretching to pay the monthly payments they already had.

“They felt squeezed,” he said. “They were just very, very upset because they just felt taken advantage of.”

Prepayment penalties are most common on subprime mortgages, which are given to high-risk borrowers with blemished credit histories, though many with good credit have been hit too.

Some lenders allow people to pay off up to 20 percent of the balance without penalty. Most companies charge a certain percentage of the loan, often 1 percent or 2 percent, or the equivalent of six months of interest if the mortgage is paid off early — generally within two to five years.

It can really hurt people, especially those who are forced to move because of a job relocation or other life event, Ghimire said. “It’s a bind,” he said. “It’s not something you want to do lightly.”

Local loan experts say they’ve seen prepayment penalties range from $5,000 to as high as $30,000. A prepayment penalty on a subprime loan of $400,000 at 7.99 percent would total nearly $13,000, said Jeff Underwood, a loan officer with AmeriFirst Financial in Mesa.

One step borrowers can take to avoid getting caught off guard is choosing a loan officer they trust instead of just searching for the lowest rate, Underwood said.

Because Arizona loan officers aren’t licensed by the state, borrowers should ask if the officers are certified with any professional organizations and how long they’ve been in the business, he said.

A good officer will explain all of the loan documents up front, but, ultimately, responsibility rests with the consumer, said Geenen with the lenders association.

With the housing market at a crawl, people have more opportunity than ever to slow the process and make sure they understand deals, Geenen said.

“They should take advantage of that,” he said. “They should be comfortable.”