Legal Question in Real Estate Law in California

Must a pre-payment penalty be specfically spelled out in a Seller-Financed Note, or is a pre-payment penalty assumed?

I've been told that although a pre-payment penalty is NOT spelled out in my note, the wording in the "Note Secured By Deed Of Trust" which states that "..Each payment shall be credited first on interest then due and the remainder on principal sum", garauntees me that if the Buyer attempts to pay off the note, a pre-payment penalty amounting to ALL of the interest will be due.

This doesn't sound to me as if it is a correct interpretation of what's written.

I am in negotiation with the Buyer and do not want to antagonize her with incorrect interpretation of th Note.

I'd appreciate any assistance.


Asked on 10/04/09, 8:21 pm

1 Answer from Attorneys

Your advice on the interpretation is wrong. Interest is due as time goes by. If the full term of the note has not passed when it is paid off, then the full amount of interest that would have been due over the life of the note would not be due. Only the amount due since the last payment. That would also be an illegally large pre-payment penalty until nearly the end of the note period. If you want a pre-payment penalty, you have to spell it out.

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Answered on 10/05/09, 2:28 am


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