Prepayment of Loans

PREPAYMENT ISSUES

If prepayment is allowed without penalties, does it reduce the term of the loan or reamortize the loan? You want it to reamortize the loan so that loan payments are reduced. This issue will become important as units are sold. Frequently, buyers want the seller to pay off their portion of the special assessment so the buyer will not have to make payments.

Boards have discovered that prepayments create problems if the loan does not reamortize since the association must continue making the same loan payments to the bank but with less money from the membership for that purpose. This results in operational funds being diverted to the loan payments which, in turn, results in higher assessments for everyone as the board is forced to increase dues to cover the shortfall.

To avoid this problem, boards can adopt a policy against prepayments by members and require buyers to assume the assessment payments of the seller. To adjust for this, buyers and sellers can negotiate arrangement between themselves such as lowering the purchase price by the amount of the special assessment or leaving that amount on the table for the buyer to use as he or she wishes.

Updated by ADAMS KESSLER 8/9/2008