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2davidc8's avatar

How do I know if the calculations of my (adjustable) mortgage payments have been correctly made through the years?

Asked by 2davidc8 (4499 points ) March 2nd, 2012

My wife and I have an ARM (adjustable rate mortgage) with only a relatively small balance remaining, so we’re thinking of paying it all off. But this got me to thinking… All these years, we have simply paid whatever amount the lender’s servicer said was due each month. I suppose most people who have ARMs just do the same.
Now, the interest rate on an ARM can change periodically, and there are other parameters involved such as the index, the margin, the adjustment period, the ceiling (i.e., that maximum interest rate), and the floor (the minimum interest rate). In addition, this mortgage has been sold many times, and even the servicer is different from the one we started with. Not only that, but the index is the 11th District Cost of Funds, one that is not very popular any more.
With so many variables, I can see many opportunities for errors. Is there any way to check whether the payments have been calculated correctly through the years?

If there is anyone who has worked in the real estate, banking or mortgage industries, I’d appreciate any information you could give me or direct me to. Thanks!

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13 Answers

MollyMcGuire's avatar

Make an appointment with the company that services your mortgage and demand a complete accounting.

LuckyGuy's avatar

Look at Financial calculators under mortgage calculators and see if the numbers make sense.
If it was my money, I would make an Excel spread sheet with columns for Month, Principal, Actual Payment, Interest rate, Calculated payment over the life of the mortgage. I would then see how close they are.
I had a fixed rate mortgage so it was easy to check. The numbers agreed to the penny. They’d better.
The banks know 98% of their customers won’t do this. But they are petrified of the 2% who will – and will report any documented abuse to the attorney general. It’s that one crazy, annoying customer in 50 who keeps them honest. (You’re welcome.)

creative1's avatar

you want to use the interest rate that was used at each time… you want to figure out the daily intererst or per diem. You do this by taking the Rate ÷ Number of Days in the year (365 or 366) × Loan Principal Balance (this will change everytime you pay money towards principal) = Per diem (Per Day of Interest Amount).

You then take the per diem and times it by the number of days between each payment and that will give you how much interest for the month you paid. Please note if you say pay your payment each day on the 1st of the month exactly then the amount of interest which will change because there could be 28, 29, 30 or 31 days in the month.

john65pennington's avatar

Ask your current and past two mortgage holders to send to a copy of their calculations of your payments. LuckyGuy is on the money when he suggests you check this out.

I did this, before I paid off my mortgage and discovered that I was owed 10 cents.

I was mailed a check for 10 cents and still have it.

2davidc8's avatar

Thank you all for your replies. My loan happens to use the 11th District Cost of Funds for an index. Does anyone know where to find the historical values of this index?

Thank you @LuckyGuy for the Excel spreadsheet suggestion!

Thank you @creative1 for showing how to calculate the interest. Are you saying I will have to go back and find out when the loan servicer received their payment each month? The payment is due on the 1st of every month, but I have 15 days of “grace period”. So, my payment does not necessarily arrive on the first of every month. So, say my payment arrived on the 10th instead of the 1st. Does this mean I will have to pay a little extra interest the following month?

@john65pennington Great suggestion. I will do that!

creative1's avatar

Yes you need to know when they received each payment so that you can calculate the daily interest rate correctly. I know my payments are all online so its easily done by logging in and looking.

Where the interest is calculated based on principal balance if you are paying part to principal and part to interest you would pay lower interest in one month and more to principal lowering your daily rate then say the next month has the longer period of time it will pay more to interest than the previous month but because the principal was less it made the daily rate less so in a way you would in the end be paying less interest because the principal was lower earlier. That is why when you get a mortgage if you put a little more in each payment towards principal especially in the beginning of the loan it can take years off the mortgage.

srmorgan's avatar

I disagree with @creative1. Residential mortgage payments are calculated on a monthly basis. Requesting payments based on the length of a month would be just too confusing to most homeowners.

Mortgage tables (the things we used to use before spreadsheets were available to us) calculated mortgage payments on a monthly basis,. There is no way that a mortgage balance could be calculated on a daily basis using the date the mortgage company received the payment. If you do not make the payment on time, the mortgage agreement is going to call for a late fee, not a recalculation of interest. Think about it, if you pay it early the lender is NOT going to give you a credit.

Getting the exact cost of funds that you SHOULD have been charged is going to be difficult since the cost of funds is hard to find. That being said it should not differ much from most of the other indices used around the country. I think you should be more worried about the cap, the floor, and the maximum amount that the rate can ratchet up and down.

creative1's avatar

@srmorgan Funny how they allow you to make principal only payments if it didn’t work that way. All loans from banks work that way… I have been paying extra on my principal loan balance and watching the daily rate go down since I got it at the end of August. Also I have the documents from my signing which outlines the interest each month based on the principal balance and when the payments are received each month. The late fee is in addition to extra interest you would need to pay. Just an fyi… personal loans, car loans, home equity lines and home equity loans all work this way as well. This is why when you need a payoff they need a date you would be paying off the loan otherwise the loan wouldn’t payoff and the bank would be looking for the rest.

@2davidc8 call your bank and ask them how they calculated your interest that you pay on the mortgage. The calculation is what I was taught when I worked at the bank ever so many years ago. We would have to help people with their loans and have to give the calculation out to them it when they disputed the interest they paid.

srmorgan's avatar

@creative1
When you signed your mortgage document you received a statement showing a fixed monthly payment for the initial period of the loan. If you have a fixed rate mortgage, your payment will not change for 30 years. Period. The amount of each payment that is credited to principal and the amount charged as interest will change each month: you pay decreasing amounts of interest each month and increasing principal each month.
The monthly interest PORTION is calculated based on the outstanding principal but the amount of principal is calculated to give you a constant payment over the period of the loan.

Look the mortgage tables are based on 12 periods per year with the annual interest rate divided by 12 to calculate the individual payment. The bank is not using the number of days in the month to calculate your payment.

If the lender is asking you for a higher payment in January with 31 day and less in February with 29 days, then something is wrong.

There are all kinds of weird products out there that were created in the early part of this decade to entice borrowers. Maybe you have something that I have never seen in my 35 years in corporate finance with the last 19 being a CFO. There is something new to see every day.

2davidc8's avatar

@srmorgan What you have described is the payments for a fixed interest mortgage. The calculations are relatively easy for those. I have an adjustable rate mortgage, where the interest rate could change every 6 months, depending on the value of an “index”. Once the value of the index is determined, the margin is added on top of that, and the sum becomes my new interest rate for the next 6 months.

The 11th District Cost of Funds is an index (I guess it is mainly used in California) just like the 1-month Treasury or the LIBOR are often used as indices. For example, if the 11DCOF is 4% in the month before my interest rate resets, and if the margin (as stated in the terms of my loan) is 2.5%, then the interest rate for the next 6 months of my loan will be 6.5%. That’s how come my monthly mortgage payment can change every 6 months. I’m trying to determine if these calculations have been correct through the years.

srmorgan's avatar

@2davidc8 I understand completely the difference between a fixed mortgage or an ARM.
I had a one-year adjustable myself for several years, when the fed funds rate went down to one percent, I was paying less than 4% for one year. Then things ratcheted up again.

Your problem is finding the 11th district Cost of Funds. What I was trying to stress is that i think that, if there were calculation problems during the life of this mortgage, the errors would more likely be in the fluctuations of the rate and in the maximum increases or decreases allowed on each adjustment. I am making the assumption that you have been serviced by more than one lender and that this is your concern.
What I was also trying to stress is that the 11thDOCF rates are not going to differ significantly other indices used in the calculation of ARM’s. It is going to correlate with the Fed Funds rate(s) or the LIBOR. So if you can not find the information on the DOCF and your lender hit you with a 2.% increase based on the DOCF, the LIBOR or the Fed rates should have moved the same number of basis points.

I only point this out if you can not obtain the true DOCF on the anniversary dates of your adjustments.

Can you find the 11th DOCF anywhere?

SRM

srmorgan's avatar

I just looked at the 11th District Cost of Funds table. It goes back to 1981 and I was reminded of the first mortgage we ever took out, $62,500 at 16% for 30 years with no pre-payments permitted during the first 12 months of the loan. This must have been the peak interest rate ever.
Long time ago

2davidc8's avatar

@srmorgan Yes, you are absolutely correct as to what my concerns are. This loan has been sold many times, and the servicer has changed many times. Lots of occasions for error. Thanks for your reply. I will look into what you’ve said. Where did you find the 11thDCOF table?

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