« College Funding Math – Part 4 | Main | Can Man Live on Contributions Alone? »
Mortgage Question From a Reader
By JLP | February 22, 2006
I received this email yesterday and wanted to share it with you, my readers and other bloggers, to see if you have run across anything like this before. Here’s the email:
I have been reading your blog for several months now and I have really appreciated the insight provided. I have recently had an issue arise with my new mortgage company & want to get an understanding of how I should go about getting this resolved. Or whether everything is ok & there is nothing to resolve.
In the middle of December we purchased a new home with a downpayment, 1st and 2nd mortgage. The issue I have run into is with how they apply the payment of the 2nd mortgage.
Details: Initial balance $41,150, 30yr Fixed Rate traditional mortgage, Interest Rate = 7.75%, Payment due on the 11th
I made my initial payment on Jan 9th for $294.87. They applied $50.23 to principal and $244.64 to interest.
My next payment (due Feb 11) did not end up posting on their system until Feb 13 (note there is a 15 day grace period). I had made a payment in the amount of $300. They applied all of the $300 to interest. None to principal.
When I called they said that it was because my payment posted after the due date and the extra payment I made was all to cover the daily interest. This doesn’t make sense to me considering the daily interest is approx. $8 a day & my payment only posted two days after the due date. According to my math that would be a total of $16 extra that needs to be covered…but I would have thought the rest would have gone to interest.
Does this make sense? Is it correct that they didn’t apply any of my payment to principal on a fixed mortgage payment? Especially considering I paid more than the minimum payment? Should I call again and raise an issue with how they applied the payment?
Any suggestions would be appreciated.
Personally, I think the mortgage company is either making a mistake or they are taking advantage of him. One thing that is not clear from the email is if we are talking about the first mortgage or the second mortgage.
Have any of you run across anything like this before?
Topics: Mortgages | 4 Comments »
February 22nd, 2006 at 12:07 pm
JLP,
This sounds like a “non-conventional” or Home Equity type loan. I say this because all
conventional loans have payments that fall due on the first with 15 days grace periods. The
Fannie Mae and Freddie Mac mortgage loans also use a “standard note” with all the same terms so
that when they are bundled on Wall Street the ultimate investor knows the terms.
The only way to answer this gentlemans question is to read a copy of his Mortgage Note. In
that document it will specify how payments are to be received and applied. Some lenders use a
360 calendar to calculate payments as well.
It is possible that there is some mistake here, but without reading the Note it is impossible to
answer his question.
February 23rd, 2006 at 9:13 am
It sounds fishy to me…
This 2nd mortgage is structured very much like my 2nd mortgage. I pay on the 19th of the month, because my home was purchased on the 19th of the month and I didn’t pay any interest at closing. I’m under the impression it’s pretty common with second mortgages.
As far as the “daily interest” they are talking referring to, that will be paid in the next payment, i.e. the March 11th payment includes the interest from February 12th through March 11th. Assuming no late fees, the person might be responsible for the interest on the unpaid principal of appr. $50 for the two days, which amounts to a couple of cents.
One thing I noticed that is different about my first and second mortgage is that my second mortgage has the interest calculated on a daily basis, so even though my payments don’t change month to month, payments where the payment is 31 days apart has a higher interest component. My first mortgage is the same every month, so that it’s calculated on a monthly basis, not daily. But that shouldn’t be a big factor here, because both payments appeared to cover 31 days.
February 23rd, 2006 at 4:22 pm
Mortgage Question from Reader
I received this email yesterday and wanted to share it with you, my readers and other bloggers, to see if you have run across anything like this before. Here’s the email: I have been reading your blog for several months…
March 30th, 2006 at 6:59 pm
It sounds like to me you that your second mortgage is a HELOC. That is a Home Equity Line of Credit. The payment on a line of credit is intrest only. It is simple intrest though, not compounded like in your first mortgage.
The way the payment is calculated follows:
On the given day the interest is calculated on the current balance of the line of credit. So if its 50,000.00 and the interest is 10% that would be $5,000.00 in annual interest. They divide that by 12 to get your monthly payment.
You can lower your payment on your line a credit by paying extra. Some people acutally even use this as a checking account. You can post your depostits to it, thus lowering your balance (hopefully around the time they calculate the payment) thus lowering your payment.
I assume you did this to avoid paying PMI (mortgage insurance) At the point you want to refinance you may want to find a lender that will not charge the PMI. You might have to pay a little higher intrest rate but you would get ride of the MI. (I think MI is a huge rip off!!!)
At any rate if you have any questions feel free to email me at pete@helpforyourmoney.com. My website is http://www.helpforyourmoney.com.
Pete