Mortgage Prepayment Penalties Could Affect Florida Home Loan Refinancing

Below, Don Taylor of Bankrate.com answers a question that can easily be transferred to Florida mortgage refinancing …

Question: I applied and was approved for a cash-out refinancing. The loan amount was for $260,000, which I expected to be enough to pay off the balance on my existing first mortgage, a home equity line of credit, a credit card balance and the loan’s closing costs.

The lender provided me with a good faith estimate for estimated settlement charges of $3,617. On the day of closing, the closing attorney’s office called to tell me that I would need to bring a check to the closing for $5,029. After making some calls, I learned from an administrator in the closing attorney’s office that my existing first mortgage had a prepayment penalty.

I didn’t close on the new loan. The refinancing didn’t make sense with the prepayment penalty. I feel that the refinancing lender had an obligation to tell me about the penalty. When I spoke to a vice president at the bank about this, he told me that the bank I currently have my first mortgage from is known for charging very high prepayment penalty fees. I told him that he should have informed me about this point before proceeding with any appraisal or closing.

To add insult to injury, I get a bill from the attorney’s office for a total of $916.50, which states I need to pay for 2.5 hours of service at $225/hour and two other fees, which they stated as $354. Can I fight this bill from the attorney’s office?

I really feel the bank was negligent in this entire process and since they knew that the bank I am using charged large prepayment penalties, then they should have known what the actual payoff was before telling me the day of the closing that I would need to provide a check for over $5,000. I feel the bank should pay the legal bill since they were negligent in the way they handled this entire process from the very beginning. Thank you.

Answer: I’m not with you on this one. A good faith estimate, or GFE, isn’t designed to show you the prepayment penalties on the existing loan; rather, it discloses any prepayment penalties on the new loan. It was your responsibility to know whether the existing Florida mortgage had a prepayment penalty. The closing costs on a GFE are just estimates and are represented as such. Allocating loan proceeds with GFEs is never a good idea.

It’s the HUD-1 Settlement Statement, not the GFE, that shows the actual settlement costs of the loan transaction.

Under the Real Estate Settlement Procedures Act, or RESPA, you had the right to request the HUD-1 or the HUD-1A one day before settlement. Here’s what the HUD Web site says about that statement:

“The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.”

There’s been a lot of discussion surrounding reforming RESPA, in part to get this information in the hands of the borrower early enough for them to use it in decision making, but future reform doesn’t do anything for your current situation.

Not paying the attorney isn’t really an option. Do you want a lien place on your home for $1,000 in unpaid attorney’s fees? You could try to talk the lender into paying the fee or the lawyer into reducing the fee, but I don’t know a reason they would be obligated to do so.

Determining whether there is a prepayment penalty should be one of the first things a homeowner considers in the decision to refinance a Florida mortgage loan. There are people who knowingly pay a prepayment penalty to refinance a mortgage - usually because their credit score has improved or they like the rate on the new mortgage enough to pay a penalty to refinance. It wasn’t the refinancing lender’s responsibility to know your mind in the decision to refinance.