Posted by SharonMN on 7/15/11 4:55pm
Msg #389805

How are payments applied to principal balance?

I have a question that is clearly not a signing agent's job to know, but I thought someone on here might know from past job experience, etc.

I've noticed that when automatic payment forms are included in a loan package, there is often an option for when the bwr wants the payment deducted. The choices generally offered are something like "the due date" or 1, 2, 3, 4, or 5 days after the due date. Sometimes they don't even include the due date. It always puzzles me why they encourage people to pay late like this. Is it because:
A. Most people don't want to pay early,
B. The auto payment system checks first to see if you've already made a payment using another method before making the withdrawal, or
C. The lender makes more interest money the later your payment is made?

Does the amount of interest paid over the life of the loan differ depending on the date the payment is made (assuming it is made within the lender's grace period)? For example, if I paid 5 days before my due date vs. 5 days after, would the interest calculations on the outstanding balance be different?

Reply by ReneeK_MI on 7/15/11 5:15pm
Msg #389808

yes - of course!

Every day that the principal does not get paid down means more interest to the lender - yes. They get a win/win - auto payments (less risk, assumably), and more interest (if you select farther out than the due date).

Reply by Bob_Chicago on 7/16/11 9:44am
Msg #389841

Disagree, Renee. See below n/m

Reply by ReneeK_MI on 7/17/11 5:53am
Msg #389923

mea culpa, I was wrong - thanks!

Thanks much to you and also Doris - the most obvious usually escapes me, and as Doris pointed out, as long as the payments are 30 days apart, the 'math' on the interest washes out regardless of the date they're paid.

From what I've read, these payment options vary widely from lender to lender - in particular, the bi-weekly pymt programs. Some lenders simply stash the payments into an separate 'escrow' account and then apply the full pymt on the due date each month. In that manner, the borrower isn't saving themselves any interest UNTIL those escrowed amounts add up to one full pymt, when the lender then posts it to the loan as a principal paydown. Some lenders WILL post them bi-weekly, though. Some charge, some don't, some will do it for free if certain 'premier' criteria are met.

Reply by samH/CA on 7/15/11 5:44pm
Msg #389812

Mortgage loan is due on the 1st day of the month.

Reply by Sha/CA on 7/15/11 5:52pm
Msg #389813

Every Note that I have ever read in a loan package clearly states that there is a 15 day grace period with which to make the payment without any penalty. I agree, less is owed to lender the sooner payment is made.

Reply by ReneeK_MI on 7/15/11 6:14pm
Msg #389819

The grace period is regulated, I believe, by state - MI is also 15 days, I wouldn't imagine the other states to be too different from each other.

The really good deals IMO are those payment programs that allow you to pay weekly - the faster you pay down, the less interest paid. I remember there used to be 3rd Party servicing companies that set that pymt schedule up for you, and charged $800-ish to do it. Can't think of the lender that offers that now, but there's no fee to do it w/them.

Reply by Bob_Chicago on 7/15/11 6:40pm
Msg #389823

Pretty sure that amortization is computed as though

payment received on the due date, (usually the first) . If paid after grace period, then
pricipal and interest are the same and you also pay a late charge in amount as set forth in note,
usually 4 or 5 % of amount of payment.
Here is language from an actual standard note:
"Each monthly payment will be applied as of its scheduled due date
and will be applied to interest before Principal. "
The perative language is "scheduled due date"


Some loans are set up for weekly, bi-weekley , semi-monthly. in the note, or with a seperate document , which usually provides for auto pay. Believe that BOA charges $4 per payment or some such for this priviledge, but your loan is paid off sooner , with less cost. This is because
principal reduced during the month as payment is received, so you are paying interest on a lesser balance. Same effect if make additonal principal payments one or more times per year.
In most cases, paying the regular payment early or late will not effect the amortization of your loan. You will end up paying the same amount over the life of the loan.
We are NOT to interpret loan documents, but you can save yourself a whole lot of time waiting for someone to pick up a phone, if you can answer a borrower's question just by pointing to a language in the documents. Spend some time reading the trypical dox that your borrowers will be signing , and make yourself a better educated and more professional NSA.

Reply by jba/fl on 7/15/11 7:19pm
Msg #389825

Good points, Bob.

This morning I asked: business slow? Got time on your hands? Try this:

I think that this post should also be under that category (although that one did specifically pertain to spelling/grammar.) If business is slow, this is the time to be getting very familiar with all the loan docs one presents to the borrowers. Sit and read - know where in the verbiage what is located. Be able to point it out to your borrowers with just a quick flip of the paperwork. Then they can read right along with you and figure out all the answers before calling the LO, who may just not be around anyway.

This is not the time to be idle.

Reply by Linda_H/FL on 7/16/11 10:25am
Msg #389843

I think some of the reasoning for offering payments

1-5 after the due date is to afford those borrowers with direct deposit the chance to make sure their pay hits their account....almost all loan payments are due on the first - at least almost every note I've seen says that, but as an example: My husband's retirement hits on the first of the month - I'd ask to have the auto-pay deducted on the 3rd or 4th simply to make sure his annuity is in the bank, especially for those months when the first is on a Saturday; or Social Security checks/deposits don't hit til the 3rd of the month - so 3-55 days late gives a chance for that money to be available.

Just my thought on that..

Also, one thing I've noticed in obtaining payoffs is yes, the payments, even if received and posted after the first, are treated as if the payment was received ON the due date. Remember, interest paid on the first is for the previous month only.

My .02 FWIW

Reply by Linda_H/FL on 7/16/11 10:41am
Msg #389845

Woops...s/b 3-5 days later - not 3-55...sorry n/m

Reply by MW/VA on 7/16/11 2:08pm
Msg #389856

While payments are always due on the first, most cos. offer

the convenience is choosing a date. My mtg. is deducted on my ckg. acct. on the 5th of every mo.
There's no extra charge for that.

Reply by Doris_CO on 7/16/11 6:35pm
Msg #389874

The payment is computed on a 30 day basis, which includes the principal amount for the month and 30 days of interest. Keep in mind that the interest is computed on the unpaid balance every day. When you make your payment, in most cases, the interest is generally taken off the top and the remainder is applied to principal. If you make your payment 31 days after the last payment was posted, then you'll be paying one extra day of interest and you'll have less money applied to principal. By setting up the automatic payment, (which is the best way to pay a mortgage in my opinion), in theory, your payments will be exactly 30 days apart and your payment will be applied as it is intended. Most companies have you make the first payment yourself and the automatic payment starts either the second or third month after the loan goes into effect.

The date of the payment isn't that important, other then the payment has to be received during the grace period, if there is one. It's the time period between payments that determines how much the principal balance is reduced. So, if the payments are posted on a different date each month, some less then 30 days apart and some more then 30 days apart, you probably will pay more interest by the end of the loan term.