'Prepayment Privilege': Misleading Realtor-speak
So it's fair to say that the techniques he suggests are probably employed by a good number of successful real estate agents. Here's a sample of his "advice" for real estate agents looking to increase sales, from his book Mastering the Art of Selling Real Estate:
"If there is a charge to refinance the property prior to the maturity date, don't call it the prepayment penalty. Who wants to be penalized? No one. Call it the prepayment privilege."
I understand the it's the real estate agent's job to put his best foot forward but, to me, that language is incredibly misleading. The truth is that everyone who buys a house has the privilege of prepaying; a prepayment penalty just adds a special cost for doing so. This tricky euphemism has no basis in reality.
But it gets worse. Encarta defines a prepayment privilege as the "right to prepay something without penalty: the right under a contract to prepay part or all of a debt to avoid interest amounts without incurring a penalty."
So not only is it misleading, it's a downright lie! A prepayment penalty is the exact opposite of a prepayment privilege.
Not surprisingly, and in part because of agents trained by people like Tom Hopkins, many consumers are not aware of how the prepayment penalties on their mortgages work. The Modesto Bee's editorial page recently suggestedthat prepayment penalties be banned outright because of all the problems that they've created in the current environment: "These penalties for paying off a loan early hinder refinancing, trapping borrowers in loans they cannot afford."
A new Federal Reserve rule bans prepayment penalties in the first four years of a loan, which is excessive. Prepayment penalties can serve an important function, allowing people who are committed to saying in a home to secure a lower interest rate. But consumers must be advised honestly about what they're getting into. Hucksters like Tom Hopkins who seek to mislead consumers do a disservice to their industry and put the futures of their clients in jeopardy.