Missouri Borrowers: Understanding Loan Prepayment Penalties

Missouri has laws in place to protect consumers from unfair practices, including those related to credit and debt collection. In Missouri, prepayment penalties for loans are generally prohibited by law. This means that lenders are not allowed to charge a fee if a borrower pays off their loan before the specified date. However, there are some exceptions and specific rules that apply to certain types of loans, such as residential real estate loans, where prepayment penalties may be allowed within the first five years of the loan, but they cannot exceed two percent of the balance at the time of prepayment.

Missouri law prohibits lenders from charging prepayment penalties after five years

Missouri law prohibits lenders from charging prepayment penalties on residential real estate loans after five years from the origination date and before maturity. This law is part of the Missouri Revised Statutes, RSMo Section 408.036, which also states that prepayment penalties for such loans cannot exceed 2% of the balance at the time of prepayment.

The statute specifically refers to loans secured by residential real estate, and it is important to note that business and corporate loans are not subject to the provisions of this section. This means that lenders in Missouri may still charge prepayment penalties on business and corporate loans, but only within the first five years of the loan, and the penalty cannot exceed 2% of the average daily balance for the previous six months.

In addition, Missouri law allows for the use of alternative mortgage instruments, which are subject to specific conditions. These include obtaining a signed certificate from the borrower indicating they have received the required disclosure materials before electing to take the alternative mortgage instrument. While these alternative instruments can provide flexibility in certain situations, they must still comply with the overall prohibition on prepayment penalties after five years for residential real estate loans.

The Missouri statute also addresses adjustable mortgage loans, which are a type of loan that permits adjustments to the interest rate, payment amount, outstanding principal balance, loan term, or a combination of these factors. While the law provides some flexibility for adjustments, it is important to note that any changes must be transparent and verifiable by the borrower, and they cannot be used to circumvent the prohibition on prepayment penalties after the initial five-year period.

Prepayment penalties cannot exceed 2% of the balance

Missouri state law prohibits lenders from charging a prepayment penalty on any promissory note or other evidence of debt secured by residential real estate when the full principal balance is paid after five years from the origination date and before maturity. In such cases, the prepayment penalty cannot exceed 2% of the balance at the time of prepayment. This rule applies to alternative mortgage instruments used in connection with residential real estate loans secured by borrower-occupied property.

The law also states that an association using an alternative mortgage instrument may not impose a penalty on any prepayment made within 90 days following notice of an adjustment. This includes adjustments to the payment and the loan balance that do not reflect an interest rate adjustment but instead reflect changes in national or regional indices, changes in the loan balance, or advances taken by the borrower under an open-end line-of-credit loan as permitted by the loan contract.

It is important to note that business and corporate loans are not subject to the same provisions as residential real estate loans. Additionally, Missouri's statute specifically addresses adjustable mortgage loans, which allow for adjustments to the interest rate, payment amount, outstanding principal balance, loan term, or a combination of these factors.

While Missouri has taken steps to protect borrowers from excessive prepayment penalties, it is always important for individuals to carefully review the terms and conditions of any loan agreement before signing. Understanding the specific provisions and potential penalties associated with prepayment can help borrowers make informed decisions and avoid unexpected costs.

Business and corporate loans are exempt from this law

Missouri law prohibits lenders from charging a prepayment penalty on any promissory note or other evidence of debt secured by residential real estate when the full principal balance is paid after five years from the origination date and before maturity. In such cases, the prepayment penalty must not exceed 2% of the balance at the time of prepayment. However, an exception is made when an existing mortgage loan is refinanced with a new lender to reduce the balance and avoid or minimise the prepayment penalty.

The state's legislation also allows associations to employ alternative mortgage instruments for residential real estate loans secured by borrower-occupied properties. These instruments offer flexibility in repayment options, including adjustable-rate loans. However, specific disclosure requirements must be met, and associations cannot impose a penalty for prepayment within 90 days of an adjustment notice.

It is worth noting that Missouri's laws are designed to protect consumers in various credit and loan situations. While business and corporate loans are exempt from the prepayment penalty restrictions, other laws and regulations, such as the Missouri Merchandising Practices Act (MMPA), provide remedies for consumers who encounter unfair practices in their transactions.

Alternative mortgage instruments are available for borrower-occupied property

In Missouri, no prepayment penalty can be charged or demanded by a lender on any promissory note or other evidence of debt secured by residential real estate when the full principal balance is paid after five years from the origination date and before maturity. In no case should any prepayment penalty exceed two percent of the balance at the time of prepayment.

• Adjustable-rate mortgages (ARM): These are a type of alternative mortgage instrument with variable interest rates. The interest rate is usually fixed for a set period and then adjusts according to an underlying benchmark rate. ARM is the most common example of an AMI loan.
• Interest-only loans: These are loans that only require the payment of the interest amount without any reduction in the principal amount.
• Balloon mortgages: This type of alternative mortgage instrument requires the borrower to make a lump-sum repayment.
• Graduated-payment mortgages: This alternative mortgage plan enables individuals to pay for their homes more easily in the earlier years. The mortgagor borrows additional money during the early years of the mortgage to reduce the monthly mortgage payments during this period.
• Roll-over mortgages: These are a special case of variable-rate mortgages. Financial institutions can issue bonds, the yield of which determines the interest rate that institutions charge the borrower.

Alternative mortgage instruments became popular in the early 1980s when high-interest rates put home purchases out of reach for many first-time homeowners. They can provide more affordable housing for middle-class homebuyers. However, the benefits may be offset by the rising cost of the mortgage if the borrower's income does not grow at the same pace as mortgage payments.

Missouri's prepayment penalty laws do not apply to commercial or consumer loans

Missouri's prepayment penalty laws are designed to protect borrowers from excessive fees when they pay off their mortgages early. By prohibiting or limiting prepayment penalties, these laws provide flexibility for homeowners who want to refinance or pay off their mortgages early. This can be beneficial in various situations, such as when interest rates drop or when a homeowner's financial circumstances change.

However, it's important to note that Missouri's prepayment penalty laws do not apply to all types of loans. They specifically exclude commercial and consumer loans, which means that borrowers with these types of loans may still be subject to prepayment penalties. It's always important for borrowers to carefully review the terms and conditions of their loan agreements to understand their rights and obligations, including any potential prepayment penalties.

Additionally, while Missouri's prepayment penalty laws provide some protection for borrowers with residential real estate loans, there may be other considerations as well. For example, lenders may have the right to take back the property if the borrower defaults on their loan, and borrowers may still be responsible for any remaining debt after collateral has been surrendered. As such, it's crucial for individuals to thoroughly understand the terms and conditions of their specific loans and seek legal or financial advice if they have any questions or concerns.

Frequently asked questions