Q: When I purchased my home a few years ago, I assumed a VA mortgage with Lender A that had a 7 percent interest rate. The mortgage now has about 15 years remaining and a balance of $30,000. I would like to pay off the loan in full, with the balance discounted by about 25 percent. Two years ago, Lender A contracted (or sold) the mortgage to Lender B. When I contacted Lender B about my proposal, it said it was not interested in any mortgage discounts.
I am a little confused as to who actually owns or controls my mortgage. Is it Lender A, Lender B, Fannie Mae or Freddie Mac? Is there anything else I can do to get my discount proposal considered? I have contacted HUD and the VA and have received no response.
A: I will be happy to respond, because I suspect that it will take you a long time before the bureaucracies at VA and HUD come up with an answer.
When you borrow money from a mortgage lender, you sign two basic documents. The first is a promissory note, whereby you agree to pay the lender the full amount of the loan in equal monthly installments. The terms of the monthly payment -- including the interest rate -- are spelled out in the promissory note. If you do not pay as required, the lender can file suit against you in accordance with the terms of the note.
You also sign a second document, which is the mortgage instrument. In most parts of the country, the mortgage instrument is called a deed of trust. Under this deed of trust, you deed the property in trust to a trustee selected by the lender. This deed of trust is recorded among the land records where the property is located; the purpose of recording it is to put the world on notice of the existence of the mortgage. We lawyers refer to this as a "lien on the land records," and thus if you want to sell the property to a third party, that third party is legally on notice of the existence of that prior mortgage.
If you make your payments each and every month on time, and you ultimately pay off the debt in full, the trustee is legally obligated to release the trust from the land records. On the other hand, if you are delinquent in your payments, the trustee has the right to foreclose on the property, and give a "trustee's deed" to whomever purchases the property at the foreclosure sale. Each of the jurisdictions in the Washington metropolitan area has different procedures and legal requirements for foreclosure, but this article cannot go into detail about those various procedures.
The promissory note you signed can be sold to other investors. In fact, the purpose of the secondary mortgage market is to assist the mortgage and real estate community in making more money locally available. In fact, mortgage lenders often sell their notes at a discount into this market, obtaining more money to lend out.
Let's take a specific example. Let us assume that you borrowed $100,000 from Lender A. Lender A may discount that note into the secondary mortgage market for $95,000. You continue to make the monthly payments to Lender A, and Lender A turns these monthly payments over to the new note holder -- after taking out a small servicing fee. Under this arrangement, lender A not only makes some money by way of the servicing fee but also has $95,000 to lend out all over again.
Needless to say, this is an oversimplification of the very complex secondary mortgage market.
The answer to your question, however, is not as complex. In your example, Lender A sold your mortgage (deed of trust and note) to Lender B. You continued to make your monthly payments to Lender A, but Lender B "calls the shots." Lender B may or may not be interested in discounting the note further, because it already paid less than face value for the note when it was purchased from Lender A. Thus, the determination of whether to permit you to pay off the loan in full with a discount ultimately rests with the new holder of the note -- in this case Lender B.
The same analysis can be made with respect to whether your note can be assumed by a new purchaser. In your example, because you have a VA mortgage, it is freely assumable. However, if you had a conventional mortgage, it might not be..
You cannot force a lender to give you a discount if you pay your mortgage off in full early. However, it certainly is worth trying, because some lenders may want to get rid of a 7 percent mortgage.
However, there is one additional question you should ask -- namely, why do you want to pay off that mortgage? Whatever tax bracket you are in, you get some tax benefits from the interest payments (not much in your case). More importantly, I know that you can get better than 7 percent interest on a savings account. Thus, merely to take money out of a savings account that pays you 8 to 10 percent to pay off a 7 percent mortgage makes no sense.
On the other hand, if you plan to refinance and pull more money out of your property, then it makes sense to pay off your VA loan.