>---------------------- Information from the mail header
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>Sender:       "Academy of Legal Studies in Business (ALSB) Talk"
>              <[log in to unmask]>
>Poster:       Sally Gunz <[log in to unmask]>
>Subject:      US mortgages
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>
>I am curious about repayment of mortgages in the US. A colleague of mine
>is faced with the situation where 2 years ago she took out a fixed five
>year mortgage at 8 percent. The contract didn't have anything spelt out
>about what would happen if she wanted out ahead. Now she wants to sell (to
>return to the US) and is told that she can get out of the mortgage but
>there is a penalty - based on some formula the bank has to do with the
>difference between the interest on current rate for the three years
>outstanding and the fixed or stated rate on the mortgage. It likely
>amounts to about $6000 because interest rates have obviously fallen. This
>seems to be a straight issue of wanting to get out of a stated contract
>and the bank is simply setting the price for such action. Clearly the bank
>would not have any "need" to do this (or desire) if interest rates had
>risen.
>
>My question: she says this is unheard of in the US and that the banks
>would just be so happy you weren't defaulting they would automatically let
>you out whatever the difference in interest rates. This seems strange
>since undoubtedly they have the same need to match funds there as here
>etc.
>
>I have no doubt that you can "wheel and deal" and that was what we all
>suggested she try and do - throw herself on their mercy. But is it indeed
>"unheard" of for a bank not to let someone out automatically at any time
>during the course of a fixed mortgage and without penalty?
>
>Just curious.
>
>Sally
 
 
 
Sally--
It is most certain heard of for banks or other lending institutions to have
prepayment premiums (remember we avoid the word penalty, because penalties are
unenforceable).  However, they are most often found in the commercial context
and are tied to changes in the interest rate market.  It is rare to see them in
the residential or consumer context, mainly because they are prohibited by the
usury laws of most states for those kinds of loans.  It might be worth a check
to see if this is true in the particular jurisdiction concerned.
 
Bob Bennett
Associate Professor of Business Law
Butler University
4600 Sunset Ave.
Indianapolis, Indiana   46208
(317) 940-9502
Email:  [log in to unmask]