Q: Do you know where I may find a list of states which allow pre-payment penalties?

I understand that pre payment penalties are not allowed on fixed rate mortgages, according to federal law, but that each state has different laws in regard to being allowed to charge a prepayment penalty on adjustable loans.

I am trying to find those states which allow prepayment penalties.

A: I’m sorry, but I don’t have that information at my fingertips. Most federally-chartered lenders will offer prepayment penalty-loans even if they’re in a state that prohibits them. They claim they do not have to follow the states’ rules because they’re federally chartered.

Personally, I think that’s hogwash. But there you are.

I’m not sure why you want to have a loan with a prepayment penalty. I’d rather see you get an adjustable rate loan that carries a lower rate than a prepayment penalty loan that locks you in for several years.

Q: I have encountered the question “Aren’t prepayment penalties on mortgages in Illinois prohibited?” many times including on your web site but I can’t find the answer. Can you help?

A: Prepayment penalties on mortgages are illegal in many states, including Illinois. However, federally-chartered lending institutions consider themselves above (or exempt) from state law and so offer prepayment penalties in exchange for a lower interest rate. But this is rarely a good deal, particularly since the average length of a mortgage is far less than 5 years (in fact, it was 1.6 years in the last survey since so many people have been refinancing).

I think federally-chartered lenders should follow the state law in which they do business. But that’s just my 2 cents.

Q: The idea of paying one’s mortgage twice a month seems like an obvious no-brainer. The mortgage companies advertise that it can save you between 10 percent to 15 percent of your total payments. My mortgage holder and I recently received a letter from them promoting this bi-monthly program…for the one time set up cost of $350.00! Does this seem right? My daughter says her mortgage company offers the same program, but at no additional cost (unless there is a “between-the-lines” disclosure).

A: There’s no need to pay anyone else to do what you can do. Take the $350 and plug that into your mortgage and then make an additional payment per year in 1/12 increments each month.

Q: In March 2000 my husband and I took out a second mortgage on our home. In June 2000 I wrote a check for $291.89 to make the monthly payment on this second. In July 2000 I discovered that my bank coded my check amount as $2,911.89, I contacted the bank and they corrected the problem. Meanwhile, the second mortgage company credited my account for the incorrect amount of $2,911.89. We put our house up for sale (by owner), got a buyer, and closed on August 25, 2000.

After the closing I received a letter from the second mortgage company (dated August 25 the date we closed) telling me about the error and they were crediting my account for the difference between the correct and incorrect payments. Then I received another letter from the second mortgage company saying the payoff they received at closing was not enough because of the mistake earlier, and I owed them the balance.

The attorney who did the closing even called me, I guess he can’t get clear title to my old house until this balance is paid off?

I talked to someone at the second mortgage company who agreed to work with me on payments and not allow any more interest to accrue on the unpaid balance. According to the second mortgage company, my next payment is due in 2007.

My questions: Do I still have to pay the money? What could happen to us if we don’t pay?

A: If you owe the cash, you should pay it. so go back and figure out what you owe. This could mess up your credit report and as near as I can figure, it’s not that much money. So negotiate something with the mortgage company where everything will be removed from your credit history (any negative information associated with this) and then pay it off.

Q: My husband and I will be retiring in 2 or 3 years. We owe approximately 18,000 on our house that is worth about $110,000. The interest rate is 7.5 percent. We will be building after retirement on property we already own. My husband feels we should pay double payments until the mortgage is paid off. I, on the other hand, feel this money should go into savings to be used toward construction of the next house. I feel that a high yield CD would give us about the same yield as paying off the mortgage early with the added advantage of having the money readily available. What is your opinion on this? Thanks for your advice.

A: If you’re building a new house and planning to stay in your current house until construction is finished, it won’t matter whether you put aside the money in a CD or savings account, or if you pay off your home. When the time comes, you’ll need to borrow against the equity in your home to get construction underway — unless you buy a brand new house from a developer.

Still, I think you should have some money in cash for emergencies. I’d start saving so you have at least 6 months’ cushion.

Oct. 17, 2003.