Thursday, November 01, 2007

query: if you pay your loan off early you will not be entitled to a refund of part of the finance charge

Tonight we have two mighty long queries, oh but this one I could type with my eyes closed. It's been a long time since I uttered these words but I did so in every closing I ever performed.

This phrase comes verbatim from the Reg Z. Let's look at it again - just so I can say it for old times sake. ;)

If you pay your loan off early you will not be entitled to a refund of part of the finance charge.

Contrast this with the alternative.....

If you pay your loan off early you may be entitled to a refund of part of the finance charge.

Oh, this is so exciting! Well, you know what I mean....

Most people when they read this phrase look at the total of payments at the top of the form and get real nervous. Don't worry about it. The disclosure is not saying you'll have to pay all of that interest. Your mortgage interest is paid in arrears, not in advance.

For instance, let's say you are closing in August and your first mortgage payment is due in October. When you make October's payment, you are actually paying the interest for September. When you make the payment in November, you are actually paying the interest for October and so on. Because you are not paying your interest in advance, there is nothing to refund. Get it?

In fact, when you payoff the mortgage, you'll be playing catch up with the interest. This is always a surprise to most folks as they expect their payoff to match the principal balance. It doesn't.

Let's say you are selling your property in December and so the payoff is taking place in December. The last mortgage payment you made was November. Well, the November payment actually paid the interest for ????? - that's right, October. Sooooo, your mortgage lender will add interest for November and the odd days of December into the payoff figures. Make sense?

OK, now let's consider the alternative version of your query. Under what circumstances might you be entitled to a refund of part of the finance charge? You'd have to be paying the sort of finance charge that is paid in advance and that is usually mortgage insurance - either FHA or conventional private mortgage insurance. The mortgage insurance may be paid ahead and a portion of that insurance may be refundable should you payoff your mortgage loan early.

Thank you for a good query.

8 comments:

Anonymous said...

Thanks Diane. Answered my question exactly. Keep up the good work!

Diane Cipa said...

You're welcome. ;)

BillVo said...

Thanks! This is the best explanation I've seen. The only thing missing is a citation.

Diane Cipa said...

You're welcome! ;)

Anonymous said...

Thanks for the clear, concise explanation. Saw that in my GFE \ TIL documents and was worried.

Diane Cipa said...

And you're welcome, too! I feel like a broken record. It does make me happy that little explanations like this are helpful and I appreciate the feedback. ;)

Anonymous said...

Thanks for the clear explanation. Same here, I was little panic and confused when review my TIL documents. Keep up the good work Diane

Diane Cipa said...

;)