Legal Question in Real Estate Law in California

Re: Second mortgage payoff to release sale.

First, it is not 100% clear what has happened here, partly because I can't read the documents in question, partly because your question is very brief and uses non-legal terms for legal concepts.

The law in California requires that most variable rate or renegotiable-rate loans carry no penalty for prepayment, at least when the rate increases. See for example Civil Code sections 1916.5, 1916.7and 1916.8. Full and accurate disclosure is also required.

Unless your loan has a variable rate and falls under the statutory restrictions, a prepayment penalty is largely a matter of private contract and if you agreed to an early-payment penalty at the time of borrowing, or as a condition of assumption by the buyer, that agreement is very likely enforceable against you.

You are entitled, I believe, to a satisfactory explanation by the lender. First, I suggest you re-read all your loan papers to see if there is an express provision for prepayment penalty. If not, ask the lender in writing for a written explanation of how your payment was applied.

Re: Second mortgage payoff to release sale.

How large was the amount that was applied to interest? Generally, when a payment is made on a mortgage, there is interest due, which always gets paid first. Then the balance goes to principle. If you sent a lump sum AND a normal payment, the normal payment would have been applied to interest and a small amount to the principle, and the lump sum would go entirely to principle. If you only paid one lump sum, then the lender was correct in applying a portion to accrued interest.

In any case, ask for an explanation and review your original loan documents for any notification at the time you took out the loan that there was a prepayment penalty.

Good luck.