By Mark Wills - Course Instructor of the Loan Signing System, Forbes Real Estate Council Member, and Best-Selling Author
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 think the closing statement in their loan paperwork is wrong because they already made their October mortgage payment.
Now let's take a deeper look at accrued interest in mortgage home loans.
You should first know that this is an important topic because interest is a line-item on the closing statement and one of the most frequently-questioned components of the loan documents overall.
And more importantly, understanding concepts like accrued interest is one of the reasons why loan signing agents make so much money.
So, an easy way to understand how interest works is to pinpoint...
The Difference Between Renting and Paying a Mortgage
When you rent, your payment is due on the 1st day of the month — this covers you for the next 30 days. Which means, essentially, you’re paying those 30 days in advance.
A mortgage is different. Your monthly payment is made "in arrears". This is an industry term that means each time you submit a payment on the 1st day of the month, you are actually paying for the previous 30 days that you've lived in the home.
For example, let's say you made your September mortgage payment on the 1st of the month... those funds cover the month of August. Then October's payment will cover the month of September, and so forth. This concept can be a little confusing for borrowers because many people are unaware of how the mortgage payment process works.
So next time you're explaining the payment schedule to a borrower, simply let them know: when you rent, you pay 30 for days in advance. When you have a mortgage, you pay for 30 days in arrears.
But what does this have to do with interest?
When you go over the closing statement with a borrower, it's common for them to have a question about the interest they owe to the current lender they are paying off (if they have one).
For instance, let's say the payoff statement states that the borrower owes interest for October 1st to October 16th. Some borrowers may object, tell you that they've already made their October mortgage payment, and insist that the closing statement is wrong.
Not to worry.
Remember what we discussed above — because their October 1st payment has been paid in arrears, they’ve paid interest for September, NOT for October. Meaning, they still need to pay interest to their lender for the month of 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 due on the closing statement.
In that same vein, if you see that the closing statement says interest owed 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.
What About Interest on the New Loan?
Regardless of whether it is a purchase or refinance, the closing statement will show interest to be collected on the new loan.
Now that you know interest is paid in arrears, understanding this concept becomes easy. Let's use the same dates from the example 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. Close of escrow 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 almost always due one month out — and in this example, it would be December because that is the first opportunity for the lender to get one full month of payment in arrears... keeping in mind that the December 1st payment is for the month of November.
If the lender collects a November 1st payment, it would only be for October 17th to October 31st. And because that is only a partial payment, lenders do not find it ideal. This is why they have the borrower pay the October interest upfront and schedule their first full 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 borrower's first payment will be due on December 1st.
What Happens if You 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 days that overlap.
It's easy. They aren't.
Here's how it works:
The escrow company has to estimate the day they think escrow is going to close. So in order to not be short interest (for the payoff amount or the new loan), they will purposely show overlapping interest on the closing statement. Then, when the loan closes, the dates will match up perfectly and the borrower will get returned any unneeded interest monies directly from escrow.
Lastly, sometimes the borrower has been told that the loan is supposed to close on the 15th day of the month, yet the closing statement shows interest due through the 18th.
Once again, not to worry — this is done on purpose.
While the loan is scheduled to close on the 15th, what happens if it closes on the 17th for some unforeseen reason? If escrow didn't overestimate the date of closing, the borrower would be short interest. Just like the overlapping interest scenario... if the escrow company overestimates the date of closing and the borrower pays more than they owe, any excess funds will get refunded after close of escrow.
Accrued Interest is a Topic that Comes Up Frequently at the Loan Signing Table
Knowing how to quickly answer simple questions about topics like this one will separate you from other signings agents who cannot do the same. Not to mention, it will cut your signing time in half. And while being helpful to borrowers during the loan signing process is critical, demonstrating your education and expertise as a notary loan signing agent also catches the attention of another crucial party in the mortgage transaction process...
The escrow officer (and often times, the mortgage officer and real estate agent as well).
And impressing an escrow officer or other mortgage professional is the single most important thing you can do for your notary loan signing business — because they have the ability to feed you high-paying, repeat loan signing jobs that typically pay between $150 and $200 each time.
Have you found this information helpful?
If the answer is YES, awesome! There is so much more where that came from in my five star-rated Loan Signing System online training course for notary public loan signing agents. Thousands of people across the nation are using my techniques right now to make hundreds or even thousands of extra dollars every month in this niche and lucrative profession.
I'm Mark, I teach Loan Signing System, and I look forward to giving you more tools just like this to help you build a successful notary loan signing business 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 20 years and owns a loan signing service that does thousands of signings a year.