The Principal Facts of Pre-Payment Penalties on New Jersey Mortgages Conforming Mortgages and Jumbo Loans - Two River Mortgage and Investment Information Source

NJ Prepayment Penalty

BRIEF HISTORY: In 1968 the State of New Jersey passed the NJ REAL PROPERTY CODE. The key line, for our conversation is 46:10B-2.. This section states, "Prepayment of a mortgage loan may be made by or on behalf of a mortgagor at any time without penalty."

At the time of the passing of the Real Property Code Mortgage Brokers most banks/lenders offered only 15 Year Fixed or 30 Year Fixed mortgages. As the 1980's emerged the mortgage industry was poised for change. The State of New Jersey enacted the Licensed Lenders Act. This Act regulated Mortgage Bankers, Correspondent Lenders and Mortgage Brokers (Among other non related entities).

In 1982 Congress passed the Alternative Mortgage Transaction Parity Act (AMTPA). The Act allowed for a major change in the mortgage industry. Non-federally chartered lenders were given parity with federally chartered lending institutions. The Parity was accomplished by the Act pre-empting State restrictions on alternative mortgage transactions. The alternative mortgage transactions were varied, but included adjustable rate (variable rate) mortgages and balloon loans.

According to notes in at www.uscode.house.gov , the AMPTA was passed at the urging of Mortgage Brokers and State Chartered Lending Institutions. The purpose was to increase the liquidity into the mortgage market, thus increasing home ownership. The AMTPA allowed for prepayment penalties on home loans, while also requiring 'life time caps' on adjustable rate mortgages. The pre-payment penalties were included to allow the lenders to retain the adjustable rate mortgage for a period of time so as to recoup the monies on the discounted rate.

At the time of the passage on the AMTPA, mortgage origination by mortgage brokers were below 10% nation wide. By 2005, mortgage originations by mortgage broker.s nation wide have increased to about 75%, 85% if correspondent lenders are included in the bulk.

O.T.S.

In the fall of 2005 the Office of Thrift Supervision (OTS) basically decided to re-interpret the AMTPA. The OTS decided to allow the States the option to accept the AMPTA or re-institute the States own laws. New Jersey decided to ignore the original intent of the AMPTA and have control reissued to the State. This became effective July 1, 2003. Initially, this re-interpretation caused problems for State Chartered lending institutions and those operating under the NJ Licensed Lender Act (Mortgage Bankers and Mortgage Brokers).

In the Fall of 2003 New Jersey enacted the Parity act. This act allowed State Chartered Lending Institutions to again act in the same capacity as the Federally Chartered Institutions. Excluded from the NJ Parity Act were those operating under the NJ Licensed Lender Act (Mortgage Bankers and Mortage Brokers).

New Jersey Department of Banking

During this same period of time New Jersey was about to enact the Anti -Predatory Lending Act. Many Mortgage Bankers & Mortgage Brokers mistakenly believed it was the Anti Predatory Lending Act that was banning Pre-Payment Penalties on conforming mortgages, Jumbo Mortgages and Super Jumbo Mortgages. This concept is in error.

To further complicate the matter, it has become almost folklore that a senior member of the NJ Department of Banking and Insurance (DOBI) made statements to the effect that 'this is a grey area, but the DOBI will overlook the usage of Pre-Payment Penalties.".

Somehow this interpretation evolved into the theory that New Jersey Mortgage Brokers could originate mortgages for sale to Federally Chartered Lending Institutions and enjoy the federal exemption from pre-payment penalties that was afforded to the Federally Chartered Banks.

In approximately September 2005, the then Director of the New Jersey Department of Banking sent a letter to the New Jersey Attorney General requesting a legal interpretation of the New Jersey Regulations as it applies mortgage Pre-Payment Penalties. What transpired next perplexed many in the industry.

Conventional or Conforming loans are called this because the loan amount 'conform' to the maximum loan amounts which may be purchased in the secondary market. The buyer of these loans is the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corp. (FHLMC, or Freddie Mac).

The old rule of thumb that you need to lower your Interest Rate by 2%, is more or less obsolete. For some people as little as a 1/2% drop in thier loan rate would be sufficient. This is a question with no definative answer. It is all relative. Foer some individuals a month savings of $100 is significant others need the savings to be higher. You must ask yourself if the monthly savings is significant to you.

Why should you consider an Interest Only Mortgage Loan? The short answer is the amount of money it will lower your monthly payment. Basically, it is intended to increase your monthly cash flow. Typically, an Interest Only Loan will have a payment about 26.5% less than a fully amortizing mortgage of the same interest rate. Since most Interest Only loans are based upon A.R.M.'s the rates are usually well below a comparable 30 Year Fixed Mortgages further reducing the monthly payment. Some Interest Only mortgages recalculate you monthly payment based upon your outstanding balance. This allows you to have additional principal payments effect your monthly payment immediately. Ask yourself, if only the interest portion of a mortgage payment (principal and interest) is tax deductible why do I want to pay down the principle portion of my mortgage? Amortizing a mortgage will gradually diminish my tax deduction. Could I better invest the principle portion of my mortgage payment? At what rate is my property appreciating? How long will I really live in this home?