Does Your Lender Deserve a Dunce Cap?

There's a very helpful blog on mortgage qualification changes, but my favorite part of it is its title:

Confusion now hath made its masterpiece! 

From Shakepeare, of course…and you thought he was out of date!

What provoked me to seek what others were saying about confusion in the mortgage market was a letter I received today from a person who had read one of my posts about United First Financial's money merge account. Chris said to me:

conventional fixed-rate mortgages will not automatically re-amortize (re-cast) a loan payment schedule after pre-payments of principal are made unless the borrower requests the loan servicer to do so.  A requested re-amortization is costly, typically $300-$750 for each time.  Why does it matter?  Without re-amortization of the payment schedule, pre-paying principal on these loans is akin to sticking the pre-paid monies into a hole in the ground and letting them depreciate until you have enough cash to pay your remaining mortgage balance.  In effect, the borrower is giving an interest-free loan to the mortgage servicer….(Warn your readers that it is never prudent to pre-pay principal without re-amortization, no matter what they have heard and who has told them so!)

If that dense paragraph is too convoluted to follow, the writer is simply saying it's impossible to pay off your mortgage early without frequently paying your lender $300-$750 to reamortize your loan–something a child can do on bankrate.com in about 15 seconds–so that your next interest payment is figured on your new lower balance!

Stop the madness! That is not true. In any month your principal is reduced, your interest owed will be reduced when the next month's payment is calculated. Mind you, interest is usually computed for the whole month. And mortgage interest is paid in arrears. Your payment due the first is for the next month, in advance - the month you haven't yet lived in your house.  But the interest included in that payment is for this month, the month you're living in before you make your next payment around the first.

Now, more about confusion. The writer says, "I am an active mortgage planner of 11 years experience." I'd like to post the name of the writer and the mortgage company Chris represents. Kindness allows me to use only the first name  (I don't know which pronoun would be accurate for Chris). But since Chris called me, and others like me who are helping people pay off their mortgages years sooner, "snakeoil salespeople," the next go-round I may not be so polite.

Real Estate.com offers 10 Things to ask your lender. Why? Because your lender may not volunteer that information. (See picture, upper right.)

Andrew Kantor filled out an online form for help and the bank started short-sale proceedings on his house. Without telling him.

Even the Brits are confused. Why? (Since everyone knows people speaking with English accents are smarter than average.)

It is because most analysts are also unsure which option is best, with confusion centring on how the Bank of England intends to change the base rate of interest in the coming year.

So there you have it. The public is confused because the experts are confused.  When the experts aren't outright misleading the public, at least some of them are keeping quiet about things the public should know.

So go ahead. Pay off your mortgage in about a third the time. If you aren't sure whether you're ready to do that, at the very least keep in touch with me so I can bring you more information as it becomes available.