Marc A. Hebert's Money Sense: Home buyers need to understand terms of any mortgage clausesBy MARC A. HEBERT
October 06. 2017 9:42PM
What are mortgage clauses? Mortgages are contracts and contain provisions (clauses) that outline special rights, powers or remedies available to the parties involved. There are many different types of clauses and these are subject to state and federal law. As a result, mortgage contracts can vary greatly, and it is important to review the contract carefully. Here are a few clauses that you might find:
. One is an acceleration clause. This allows the lender, under certain conditions, to demand the entire balance of the loan be paid in a lump sum immediately. This includes the interest that has accrued since the clause was invoked. The borrower, however, doesn't have to pay the interest that would have accrued over the life of the loan.
Missing a few payments is a situation in which an acceleration clause could come into play. Usually, the lender is required to give the borrower some notice that this is occurring and time to remedy the situation. Borrowers facing this clause could try working out a loan modification or repayment plan with the lender to make up the delinquent payments. Unless the borrower puts the lender in the same position as it would have been in, but for the borrower's default, the lender might begin foreclosure proceedings to take the property back.
. There also could be an assumption clause. This allows the seller of a home to pass the responsibility for the existing mortgage to the buyer. Sometimes the buyer also might be able to assume the seller's interest rate. This clause might be valuable from the buyer's point of view as he or she can avoid settlement costs and the mortgage application process. However, the interest rate of the loan might not be acceptable and many conditions and fees might be required.
. A conversion clause is often found in adjustable-rate mortgage (ARM) contracts. This allows a borrower to convert the ARM to a fixed-rate mortgage at a specific point. With adjustable-rate mortgages, the interest rate can fluctuate over time - going up or down depending on various factors. A fixed-rate loan has a set interest rate that won't change and a set payment amount for the duration of the loan. Changing to a fixed-rate mortgage makes the payments more predictable. Generally, the borrower must give the lender 30 days' notice before converting, and there could be fees. Make sure to understand how the interest rate for the fixed-rate mortgage is set.
. Due-on-sale clauses allow the lender to accelerate the loan if the borrower transfers a substantial beneficial interest in the property to another party. An example of when this might happen is if the home was sold.
. An escrow covenant is typical in many loans. This requires the borrower to pay hazard insurance and property tax in installments to the lender in advance. The lender holds these funds until the payments are due. The bills are then submitted to the lender and subsequently paid from the escrow account.
. A prepayment clause gives the borrower a right to pay off the loan prior to maturity without penalty.
Remember that for all mortgages the borrower is required to keep property insurance against loss by fire and certain other hazards through an insurance covenant. This is done so the lender is protected if anything unfortunate happens to the property. If the borrower does not obtain the appropriate coverage, the lender may obtain it at the borrower's expense.
As a final point, as with any contract, make sure to review and understand the terms prior to signing on the bottom line. The closing attorney or settlement agent might not review each and every provision - it is necessary for the buyer to do so.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com. Your question and his response might appear in a future column.