Let's talk about interest and how to explain it to a borrower during a loan signing.
In the video below, you'll see exactly how I would explain to a borrower if they thought the closing statement is wrong because they made their October payment
Allow me to dive into it deeper now.
First understand that this is important is because interest is a line-item on the closing statement and frequently questions come up during a loan signing about interest.
In my loan signing system course, the closing statement is the first document you should review with the borrower so you should be sure to understand this concept.
And knowing concepts like accrued interest is the reason why loan signing agents make so much money.
Once again, to make interest easier to understand, let's talk about the difference of renting and paying a mortgage. When you rent, you pay on the 1st and the covers you for the next 30 days. You’re paying those 30 days in advance.
A mortgage is different. You pay what is called, in arrears. Meaning when you pay on the first of the month, you are actually paying for the previous 30 days that you lived in the home.
So, let's say you paid your September mortgage payment on the 1st of the month, you are actually paying for the month of August. And that is where it can be a little confusing for a borrower because most borrowers don’t know that.
Remember when you are explaining it, when you rent, you pay for the 30 days in advance. When you have a mortgage you pay for 30 days in arrears.
So why is this is important to understand as notary loan signing agent?
Because when you go over the closing statement with the borrower, they frequently have a question on the interest they owe their current lender they are paying off.
If the payoff says that the borrower owes interest for October 1st to October 16th, a lot of borrowers will gawk and tell you they made their October payment and the closing statement is wrong.
Remember, the first part of this video since their October 1st payment is paid in arrears, they’ve paid interest for September, NOT for October. So they still need to pay owe to the current lender for October that hasn’t yet been paid.
And since the closing statement does not say they owe interest from September 1st to October 16th, you know that escrow has accounted for their October payment being made because there is no September interest showing on the closing statement.
On that same vein, if you see that the closing statement says interest they owe on their payoff from September 1st to October 16th, you should be able to come to the conclusion that have not made their October payment.
But now, let's talk about interest on the new loan.
Regardless if it is a purchase or refinance, there will be interest that is being collected on the new loan on the closing statement.
Now that you understand that interest is paid in arrears, this should be easier to understand. Using the same dates above, if the new loan is going to close on October 16th, the borrower will have to pay interest from October 17th to October 31st. At closing is the only time the borrower will pay interest in advance. The reason this occurs is because the lender does not want to collect a partial payment in arrears on November 1st.
That's why the first payment is a month out, and this example it would be December because that is the first opportunity to get one full month in arrears. Remember that the December 1st payment is for all of November.
If they collect a November 1st payment, it would only be for October 17th to October 31st. They don't want that. Therefore, they have the borrower pay the October interest upfront and set their first payment date for December 1st.
So, if you see that the lender is collecting interest for October 17th to the 31st on the closing statement, you should be able to conclude that their first payment is December 1st.
Sometimes when you go over a closing statement you will notice overlapping interest on the closing statement. Let’s say you see interest being collected on the old loan for October 1st to October 17th and interest on the new loan being collected from October 15th to October 31st. The borrower may ask why they are paying double interest on the overlapping days.
They are not. The escrow company has to estimate the closing date of escrow. So in order to not be short interest (for the payoff or the new loan), they show overlapping interest.
When the loan closes, the dates will match up perfectly and the borrower will get returned any unneeded interest directly from escrow.
Lastly, sometimes the borrower knows that the loan is suppose to close on the 15th. But yet the closing statement shows interest to the 18th. This is done on purpose. While the loan should close on the 15th what happens if it closes on the 17th for some unforeseen reason. If they didn't over estimate they would be short interest. Just like the overlapping interest, if escrow over estimated any interest the borrower will get it back at closing from the escrow company.
Accrued interest is a topic that comes up frequently in your loan signings. Knowing how quickly answer simple questions will separate you from other signings agents who can not. Not to mention it will cut your signing time in half.
Remember our job is to be an impartial loan signing agent, not an uneducated loan signing agent.
This blog is just an example of the many concepts you will learn in my loan signing system online video training course.
Order my Loan Signing System online video course so you can get an actual closing statement in the loan docs. Then practice walking a borrower through the concept of accrued interest. It will help reduce the time you spend in a loan signing, and allow you to do more signings in less time.
I’m Mark, I teach the Loan Signing System, and I’m looking forward to helping you become a top loan signing agent.
Click the link to get the course today!
About the Author
Mark Wills is the course instructor of the top rated Loan Signing System agent training course. He has been an active professional loan signing agent for nearly 15 years and owns a loan signing service that does thousands of signings a year.