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Federal Trade Commission
An acceleration clause allows the lender to speed up the rate at which your loan comes due. Suppose you've missed a payment, and your contract gives the lender the right to "accelerate" the loan when a payment is missed. This means that the lender now has the power to force you to repay the entire loan immediately.
Here, taken from a mortgage contract, is a sample acceleration clause: "In the event any installment of this note is not paid when due, time being of the essence, and such installment remains unpaid for thirty (30) days, the Holder of this Note may, at its option, without notice or demand, declare the entire principal sum then unpaid, together with secured interest and late charges thereon, immediately due and payable. The lender may without further notice or demand invoke the power of sate and any other remedies permitted by applicable law."
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Note the use of the term "without notice"
above. If this contract provision is legal in your state, you have waived
your right to notice. In other words, you've given up the fight to be notified
of some occurrence for example, a missed payment. If you've waived your
right to notice of delinquency or default, and you've made a late payment,
action may be initiated against you before you've been told; the lender
may even start to foreclose. Know whether your contract waives your right to notice. If so, obtain a clear understanding in advance of what you're giving up. And consider having your attorney check state law to determine if the waiver is legal. A due on sale clause gives the lender the right to require immediate repayment of the balance you owe if the property changes hands. Here's an example of a due on sale clause: "If all or any part of the Property or an interest therein is sold or transferred by Borrower without Lender's prior written consent... Lender may, at Lender's option, declare all the sums secured by this Mortgage to be immediately due and payable. Due on sale clauses have been included in many mortgage contracts for years. They are being enforced by lenders increasingly when buyers try to assume sellers' existing low rate mortgages. In these cases, the courts have frequently upheld the lender's right to raise the interest rate to the prevailing market level. So be especially careful when considering an "assumable mortgage." If your agreement has a due on sale provision, the assumption may not be legal, and you could be liable for thousands of additional dollars.
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WraparoundAnother variation on the second mortgage is the wraparound. Suppose you'd like to buy a $75,000 condominium and can make a $25,000 down payment, but can't afford the payments at the current rate (12%) on the remaining $50,000. The present owners have a $30,000, 8% mortgage. They offer you a $50,000 wraparound mortgage at 10%. The new loan wraps around the existing $30,000 mortgage, adding $20,000 to it. You make all your payments to the second lender or the seller, who then forwards payments for the first mortgage. You'll pay the equivalent of 8% on the $30,000 to the first lender, plus an additional 2 % on this amount to the second lender, plus 10% on the remaining $20,000. Your total loan costs using this approach will be lower than if you obtained a loan for the full amount at the current rate (for example, 12%).Wraparounds may cause problems if the original lender or the holder of the original mortgage is not aware of the new mortgage. Upon discovering this arrangement, some lenders or holders may have the right to insist that the old mortgage be paid off immediately.
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