Can the First Payment Be Collected Early?
April 30, 1999, Revised July 10, 2007
" We closed on June 17,1998. The mortgage broker said that monthly payments would start on Aug. 1 but the lender demanded a payment on July 1. Upon researching the loan documents we saw that we did sign that the first payment would begin on July 1st. Now I realize that we are being charged a lot of extra interest. I called the lender, and was told that 'you signed that you would pay on July 1st,' and no other explanation was given… Is this legitimate?"
Collecting the first monthly payment a month early may be a sneaky way to transfer a few dollars from you to the lender, or it may have been a straightforward way to reduce your closing costs. You didn't tell me enough to know which it is.
To facilitate their bookkeeping, lenders always design mortgage contracts so that the first monthly installment payment is due on the first day of a month. This means that at closing, the borrower usually pays interest for the period between closing and the first day of the following month. The first installment payment is then due the first day of the month after that.
If you closed on June 17, for example, you would have paid "per diem interest" for the 14 days to July 1, and the first installment payment should have been due August 1.
But there is an alternative that is used occasionally. Instead of you paying for 14 days, the lender could pay you per diem interest for the first 17 days of the month, in which case your first payment would be due July 1. This approach is used to reduce the borrower's closing cost. See Mortgage Closing Date: Does it Matter?
If in fact you were the one to pay the per diem interest, given that you had to make the first payment on July 1, you were scammed.
It isn't a big scam, the total amount you pay remains the same but the lender receives the money sooner, which raises the cost modestly. For example, on a 30-year loan at 7% with zero points or fees, moving the first payment one month forward raises the true Annual Percentage Rate (APR) of the loan over 30 years from 7% to 7.06%.
In the 1970s there was a class action lawsuit against a group of savings and loan associations in Pennsylvania who throughout their entire history had been collecting the first payment one month early. One of the charges was that these lenders had violated the Truth in Lending Act by understating the APR. The institutions settled the lawsuit and relinquished the practice, as did other depositories in Pennsylvania who had been doing it. Yet there are still a few states in which some depositories continue the practice.
Check your closing statement to see if you paid, or received, per diem interest at closing. If you paid, let me know.
" We closed on June 17,1998. The mortgage broker said that monthly payments would start on Aug. 1 but the lender demanded a payment on July 1. Upon researching the loan documents we saw that we did sign that the first payment would begin on July 1st. Now I realize that we are being charged a lot of extra interest. I called the lender, and was told that 'you signed that you would pay on July 1st,' and no other explanation was given… Is this legitimate?"
Collecting the first monthly payment a month early may be a sneaky way to transfer a few dollars from you to the lender, or it may have been a straightforward way to reduce your closing costs. You didn't tell me enough to know which it is.
To facilitate their bookkeeping, lenders always design mortgage contracts so that the first monthly installment payment is due on the first day of a month. This means that at closing, the borrower usually pays interest for the period between closing and the first day of the following month. The first installment payment is then due the first day of the month after that.
If you closed on June 17, for example, you would have paid "per diem interest" for the 14 days to July 1, and the first installment payment should have been due August 1.
But there is an alternative that is used occasionally. Instead of you paying for 14 days, the lender could pay you per diem interest for the first 17 days of the month, in which case your first payment would be due July 1. This approach is used to reduce the borrower's closing cost. See Mortgage Closing Date: Does it Matter?
If in fact you were the one to pay the per diem interest, given that you had to make the first payment on July 1, you were scammed.
It isn't a big scam, the total amount you pay remains the same but the lender receives the money sooner, which raises the cost modestly. For example, on a 30-year loan at 7% with zero points or fees, moving the first payment one month forward raises the true Annual Percentage Rate (APR) of the loan over 30 years from 7% to 7.06%.
In the 1970s there was a class action lawsuit against a group of savings and loan associations in Pennsylvania who throughout their entire history had been collecting the first payment one month early. One of the charges was that these lenders had violated the Truth in Lending Act by understating the APR. The institutions settled the lawsuit and relinquished the practice, as did other depositories in Pennsylvania who had been doing it. Yet there are still a few states in which some depositories continue the practice.
Check your closing statement to see if you paid, or received, per diem interest at closing. If you paid, let me know.