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Prepayent Clause

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missflo

Member
What is the name of your state (only U.S. law)? New Mexico

My husband and I entered into a mortgage a couple of years ago on some commercial property which contained a prepayment penalty clause which applied to the first 5 years, within which we would be subject to a 5% penalty along with total interest due on the remaining loan balance, should we pay any portion of the principal or pay off the mortgage. We did not plan to sell this property but are now in a position where we would like to do so and have an interested cash buyer. Due to this clause, however, it appears we can not sell in this manner and still benefit from the sale. I have been told, previously, that a prepayment penalty on residential property is illegal in New Mexico but the mortgage holder is a Delaware LLC and this property is commercial. Is this clause enforceable? Does anyone know anything that would pertain to this situation?

Thanks!
 


FlyingRon

FlyingRon

Senior Member
The law applies in the state that the mortgaged property is in.
You need to read the mortgage docs carefully to see if there are any exceptions to the prepay penalty. I think the total LOAN fees are capped in NM to 5%, so if you payed any up-front points they prepayment fee can't end up pushing that over 5%.
 
N

nextwife

Senior Member
Laws that apply to residential RE would not automatically apply to commercial. Two different animals.
 
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H

HomeGuru

Senior Member
missflo said:
What is the name of your state (only U.S. law)? New Mexico

My husband and I entered into a mortgage a couple of years ago on some commercial property which contained a prepayment penalty clause which applied to the first 5 years, within which we would be subject to a 5% penalty along with total interest due on the remaining loan balance, should we pay any portion of the principal or pay off the mortgage. We did not plan to sell this property but are now in a position where we would like to do so and have an interested cash buyer. Due to this clause, however, it appears we can not sell in this manner and still benefit from the sale. I have been told, previously, that a prepayment penalty on residential property is illegal in New Mexico but the mortgage holder is a Delaware LLC and this property is commercial. Is this clause enforceable? Does anyone know anything that would pertain to this situation?

Thanks!
Click to expand...
**A: I suggest you have a real estate/mortgage attorney review your docs.
 
R

Renter02

Junior Member
New Mexico has a state law forbiding financial penalties for prepaying all or part of your home loan during the loan term. Most mortgage lenders in the state must comply with this law, but there are a few exceptions. Mortgage lenders that are divisions of interstate banks are governed by federal law and are exempt from the New Mexico ruling. These institutions can charge penalties for early payment of the loan.

I just looked this up so you might want to check into it more and ask your mortgage attorney and also because you have a commercial loan.
 
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FlyingRon

FlyingRon

Senior Member
.... let me go back ...

Yes, there is a bar on prepayment penalties on home loans. The OP knew that, I knew that, you know that.

This is not a home loan.

As I stated in post #1, 5% is the maximum statutory fee on any mortgage. The prepayment (as well as any prepaid points) can not exceed this.

Some prepayment penalties have a sales exclusion, he needs to read his docs.
 
R

Renter02

Junior Member
Renter02 said:
New Mexico has a state law forbiding financial penalties for prepaying all or part of your home loan during the loan term. Most mortgage lenders in the state must comply with this law, but there are a few exceptions. Mortgage lenders that are divisions of interstate banks are governed by federal law and are exempt from the New Mexico ruling. These institutions can charge penalties for early payment of the loan.

I just looked this up so you might want to check into it more and ask your mortgage attorney and also because you have a commercial loan.
Click to expand...
I will say it again also because you have a commercial loan
 
A

Antigone*

Senior Member
missflo said:
What is the name of your state (only U.S. law)? New Mexico

My husband and I entered into a mortgage a couple of years ago on some commercial property which contained a prepayment penalty clause which applied to the first 5 years, within which we would be subject to a 5% penalty along with total interest due on the remaining loan balance, should we pay any portion of the principal or pay off the mortgage. We did not plan to sell this property but are now in a position where we would like to do so and have an interested cash buyer. Due to this clause, however, it appears we can not sell in this manner and still benefit from the sale. I have been told, previously, that a prepayment penalty on residential property is illegal in New Mexico but the mortgage holder is a Delaware LLC and this property is commercial. Is this clause enforceable? Does anyone know anything that would pertain to this situation?

Thanks!
Click to expand...
Prepayment penalties on commercial loans are pretty standard in the industry if you have a fixed rate loan. Most variable rate loans do not have prepays because the interest rate risk is lower.

Before you make any additional principal payments, you will want to review the language in your loan docs. Many have clauses that only allow you to prepay a certain percentage of the loan ~ again this is because of the interest rate risk.

The clause is enforeable ~ I have seen some very stiff prepays in my career (several hundred thousand dollars). The lender has calculated that they will earn a certain amount or revenue on your loan and they will hold you to that deal.

This won't help the OP, but for anyone who is looking for a fixed rate with a variable rate loan might want to ask their banker about a SWAP. In this rate environment a SWAP can actually pay the borrower back.
 
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