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And the WORD for Today is:
Pre-payment Risk – refers to the possibility of receiving full or partial payment from the borrower before the principal is due. A full pre-payment typically results from the sale or refinancing of a mortgaged property. A partial pre-payment typically occurs when a borrower applies additional money toward the reduction of the principal owed on a mortgage. While such a pre-payment is not a common practice, it is an excellent way for a borrower to significantly reduce the amount of interest they pay over the term of the loan. Pre-payments reduce the value of the mortgage servicing right asset, as the anticipated servicing cash flows are effectively reduced. Many lenders in the sub-prime market strongly inhibit pre-payment activity my imposing harsh pre-payment penalties on a borrower who wishes to pay the entire loan off early. Reinvesting the money from pre-paid principal could be very costly to an investor since they would then need to reinvest and are most likely going to receive a lower interest rate (yield) than the mortgage was paying. Borrowers should be aware that pre-payment penalties can be high enough to effectively lock you into a mortgage you would prefer to pay off early. The solution: be sure your loan does not include such a penalty for repaying the principal early.
Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.
You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.
(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)
Pre-payment Risk – refers to the possibility of receiving full or partial payment from the borrower before the principal is due. A full pre-payment typically results from the sale or refinancing of a mortgaged property. A partial pre-payment typically occurs when a borrower applies additional money toward the reduction of the principal owed on a mortgage. While such a pre-payment is not a common practice, it is an excellent way for a borrower to significantly reduce the amount of interest they pay over the term of the loan. Pre-payments reduce the value of the mortgage servicing right asset, as the anticipated servicing cash flows are effectively reduced. Many lenders in the sub-prime market strongly inhibit pre-payment activity my imposing harsh pre-payment penalties on a borrower who wishes to pay the entire loan off early. Reinvesting the money from pre-paid principal could be very costly to an investor since they would then need to reinvest and are most likely going to receive a lower interest rate (yield) than the mortgage was paying. Borrowers should be aware that pre-payment penalties can be high enough to effectively lock you into a mortgage you would prefer to pay off early. The solution: be sure your loan does not include such a penalty for repaying the principal early.
Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.
You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.
(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)
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