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Unformatted text preview: nge a business or investment property, can enhance the salability of the property by encumbering the property with a large new assumable loan at attractive terms. Combine this objective with the objective of acquiring tax–free cash, and the property owner is a good candidate for refinancing. REASONS NOT TO REFINANCE
NO REAL ADVANTAGE
Good Existing Terms – A current loan written with good terms should not be disturbed when it is possible to avoid it, whenever any loan is paid off, the trustor is required to come up with cash. As a general rule there is an economic advantage to avoid coming up with cash. The 2%, 36 month rule should be applied unless there are other persuasive reasons to refinance. Prepayment Penalty – A lender is likely to waive a prepayment penalty if the loan being paid off is at an interest rate lower than the current market rate. The lender would naturally like to eliminate a less profitable loan. Conversely, a lender is not likely to waive a prepayment penalty written into a more profitable (higher interest rate) loan. California Civil Code § 2954.9 provides that a
15-4 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 15: REFINANCING OR NOT AND CHOOSING A LENDER
prepayment penalty provision may not extend beyond five years on an owner– occupied dwelling of not more than four units. In any 12–month period during those five years the borrower may pay off up to 20% of the original principal amount without any penalty. The lender may charge up to six months' interest on any amount in excess of that 20% in that year. For loans limited by the Broker's Loan Law, the prepayment provision may extend through seven years. Even with the limitations, however, a prepayment penalty can drive up costs of refinancing heavily. On our example of a 30–year $100,000 loan at 10%, $80,000 could be subject to six months' interest, or $4,000. Low Equity – An owner who somewhat recently financed the purchase of a home with a low down-payment PMI loan probably has not built up enough equity to make refinancing reasonable unless the home has undergone enormous appreciation as a result of unu...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10