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 what I would explain to a borrower if they thought loan documents' closing statement is wrong because they already 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 questions frequently come up during a loan signing about interest.
In my Loan Signing System course, I teach my students why the closing statement is the first document you should review with the borrower, so you should be sure to understand this concept as well.
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 between renting and paying a mortgage. When you rent, you pay on the 1st of the month, which covers you for the next 30 days. Essentially, 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 1st 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 actually just paid 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 explaining this concept borrowers, simply let them know: when you rent, you pay for 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 about 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 what we discussed in the first part of this video - because their October 1st payment is paid in arrears, they’ve paid interest for September, NOT for October. So they still need to pay interest to their lender for October.
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.
In that same vein, if you see that the closing statement says interest that they owe on their payoff demand is from September 1st to October 16th, you should be able to come to the conclusion that they have not made their October payment.
So now let's talk about interest on the new loan.
Regardless of whether it is a purchase or refinance, there will be interest that is being collected on the new loan that will appear on the closing statement.
Now that you understand that interest is paid in arrears, this should be easier to comprehend. 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. Lenders 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 the borrowe's first payment will be due on December 1st.
Sometimes when you go over a closing statement you will notice overlapping interest. 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 will purposely 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 supposed to close on the 15th, 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 overestimate they would be short interest. Just like the overlapping interest, if escrow overestimated any interest the borrower, will get it back at closing from the escrow company.
Accrued interest is a topic that comes up frequently in loan signings. Knowing how to quickly answer simple questions about topics like this one will separate you from other signings agents who cannot. 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 one example of the many concepts you will learn in my Loan Signing System online video training course.
Click the link below to order my Loan Signing System online video course so you can get an actual closing statement used in real loan documents. 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!
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 20 years and owns a loan signing service that does thousands of signings a year.