What would you say if you opened your mail and saw a check from your mortgage company that was for the exact amount of the payment you just sent to them? You might wonder if you were in the twilight zone – after-all, since when do mortgage companies return a payment?
It turns out that it is a sneaky way to make sure that you pay more in interest – unless you take very specific actions to tell them otherwise.
Post 2008, after the US Government started cracking down on deceptive practices in the mortgage market, a lot of banks and mortgage companies saw their revenue and profits take a tremendous dive. Many of them started to look for ways to make up for the shortfall. This resulted in some bizarre clauses in new mortgage agreements.
Central Mortgage Company includes a clause in their fine print that does not allow you to make a partial payment. When does it make business sense for a mortgage company to refuse any kind of payment?
It turns out that its a way to reduce that use of a very popular strategy that decreases the length of your mortgage and the overall interest you would pay over the life of the loan.
If you break up your mortgage payment into two pieces, sending one in two weeks earlier and the other on the due date, you can potentially reduce the interest you pay and pay off your mortgage by as much as 7 years earlier.
But, Central Mortgage Company does not allow this strategy. Their mortgage agreement specifically states that only payments for the full amount due are allowed. Other companies do the same thing as well
Here is another way that mortgage companies put impediments in your path to paying off your mortgage earlier: They make it a mandatory requirement that you tell them in writing that an excess payment is to be applied to principal.
In an era where many people send in payments via their bank’s bill payment service, it becomes an impediment to write a physical check AND a letter just to apply a small extra payment to the principal on your mortgage.
Some of these sneaky revenue enhancement tactics can get you in other ways – primarily by making you incur late fees, especially the first time you attempt to make a partial payment.
Imagine this scenario: You schedule a series of partial payments (eg: once per week or once every two weeks) on your mortgage with the intention that full payment will accrue by the time the due date arrives. The mortgage company starts to return your checks but you’re on vacation or maybe you only clear your mailbox every so often (how often does important time-sensitive mail actually arrive in your mailbox?). It is pretty easy to suddenly be in a situation where your mortgage isn’t paid on time because the company simply returns your checks. By the time you realize what’s happening you’re being hit with one or more late fee charges.
Or, lets say that the mortgage company is responsible for paying your taxes and your taxes increase which necessitates an increase in your mortgage payments. Your next month’s mortgage payment to the company can arrive before their payment increase notification letter arrives. Your payment that you thought was fine, is rejected. If you’re not paying attention to your snail-mail box you might not find out until its too late so once again you get hit with a late fee. Of course, if they had accepted your partial payment the late fee would not be as large. By rejecting your payment they actually hope that you will miss the deadline and incur the late fee. And if you don’t realize that you have to pay the late fee you might end up with multiple layers of late fees.
All through no fault of your own. So while the most egregious mortgage fraud practices are no longer a risk to consumers, new, more sneaky ways to increase profits are now creeping into mortgage agreements.
At the closing table your lawyer should be the one watching out for you. But there’s a good chance that he/she didn’t tell you about these little nuances in the mortgage agreement. Maybe most lawyers aren’t even aware of these kinds of issues yet. Now that is just scary!
