By permitting front-loaded costs, states encourage refinancing

Although state laws that are most prohibit prepayment fees, specific clauses effortlessly penalize borrowers for repaying very early or refinancing. For instance, at the least 25 states enable loan providers to utilize the “rule of 78s,” also called the “sum of digits,” as their rebate method—that is, the procedure for calculating simply how much of a loan’s total finance fees they are going to receive from borrowers whom repay early. 66 The rule allows lenders to get a disproportionate share of great interest and costs for loans paid back into the very early months, allowing loan providers to earn significantly more than 70 per cent associated with loan’s revenue that is total when financing is refinanced halfway through the definition of, as opposed to the 50 % they might get by that time if all costs were spread evenly within the loan term. 67 This produces an incentive that is strong loan providers to encourage borrowers to refinance.

Origination or other upfront charges additionally give loan providers a strong motivation to refinance loans since they may charge these fees each and every time the mortgage is released or refinanced. A $500 loan can collect a $50 origination fee each time the loan is refinanced, substantially increasing the costs for borrowers for example, origination fees in Alabama are 10 percent of the amount financed and are not refundable upon prepayment, so a lender that issues.

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