Borrowers Beware: Check Your Loan Calculations
Home mortgage lenders originate 5 million to 6 million new loans every year, so it is hardly surprising that now and then they make a mistake. Occasionally they miscalculate the monthly mortgage payment.
On a fixed-rate mortgage, the payment remains unchanged for its life, so if a mistake occurs, it happens when the loan is originated.
On an adjustable rate mortgage, a mistake can occur when the loan is originated or on any rate adjustment date.
I frequently receive letters about lender mistakes, and recently two came in on the same day. In one, the payment was set too high and in the other it was set too low. The consequences for the borrowers, and their reactions, were very different.
Question: In 1983 I took out a 25-year loan. In just 15 years, the loan was completely discharged. During this entire period, I never made a single extra payment. The only thing I did differently was [to make] absolutely sure that the payment was received by the lender one day before the due date. I was incredulous myself and checked with the lender to make sure there had been no mistake, but [the lender] assured me that my debt was fully discharged. That one day of saved interest, compounded month after month, knocked 10 years off the term. When you have investigated this incident and are satisfied it is correct, I hope you will inform your readers.
Answer: On a standard mortgage such as you had, paying one day before the due date has no effect whatever on the amortization schedule. Whether the payment is one day early or one day late, it is credited as of the first day of the month.
In the case of a simple-interest mortgage on which interest is calculated daily, paying a day early does save a little interest. The effect on the term, however, is negligible.
My investigation revealed that the loan officer who originally calculated your mortgage payment mistakenly used a 15-year, rather than a 25-year, term. Neither the processor nor the underwriter who subsequently examined your file caught the error, so it persisted through the life of the loan. If the payment amount is calculated using 15 years, the loan will pay off in 15 years, even though the note says that it is a 25-year loan.
But you came out OK. Of course, you would have done even better if you had selected a 15-year loan at the outset, because the interest rate would have been lower.
Q: Fifteen years ago I took out a 20-year adjustable-rate mortgage. The note says that the last payment will be due about five years from now.
I recently discovered, however, that on the first rate adjustment 14 years ago, the payment was miscalculated. It assumed the loan had 29 more years to run instead of 191/2 years. When I expected to be out of debt, I will still owe $40,000.
This is a serious problem for me. I took out a 20-year loan because I planned to retire in 20 years. Now I will either find myself financially strapped for 10 years or I will have to extend my employment. Do I have a legal claim against the lender?
A: I’m not a lawyer, but my guess is that you would find it difficult to demonstrate that the lender’s mistake caused you financial loss. You have some responsibility, furthermore, for not checking the payment calculation.
Any borrower with an adjustable-rate loan should check the payment calculation whenever the rate changes. You can do this easily with a monthly payment calculator, such as the HP 10B that is available for about $25. In the register for term (N), enter the number of months remaining. In the interest rate register (I), enter the new interest rate. In the present value register (PV), enter the last loan balance. In the future value register (FV), enter 0. Then solve for the payment (PMT). The great majority of home loans today are either for 15 or 30 years. That means that loans with other terms are the most vulnerable to mistakes in the payment calculation.
The two examples discussed here were a 25-year loan converted by mistake into a 15 and a 20-year loan converted by mistake into a 30.
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Jack Guttentag is a syndicated columnist and professor of finance emeritus at the Wharton School of the University of Pennsylvania. Questions or comments can be left at https:// www.mtgprofessor.com .
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Distributed by Inman News Features.
