Occasionally I like to play professor by writing about some of the more interesting questions I receive. The ones I have selected below are all interesting for different reasons.
Related to the reversal in loan
balance change is reversal in payment flows. On a standard
mortgage, the borrower is required to
a monthly payment, whereas the reverse mortgage borrower has
an option to draw
a monthly payment, or irregular amounts against a credit
You can skip a month if you inform your servicer that one
payment is for the current month and the second payment is
for the following month. That isn’t exactly “skipping it”,
it is better described as paying the second month in
If your intention is to pay off the loan sooner by having
the entire second payment credited to principal, then you
cannot use it to pay in advance. You can pay in advance, or
you can pay down the loan balance faster, but you can’t do
both with the same payment.
What you can do is make sure that what happens with your
payments is what you want to happen. If you want to pay in
advance, write two checks for the payment amount, each with
the notation “Payment for Name of Month”. If you want to pay
down the balance, write “Apply to Principal” on the check,
and make sure that the amount so designated is not exactly
equal to the monthly payment.
Today I received a letter saying that since most of the interest collected on a home mortgage is in the early years, and the typical loan has a life of about 7 years, the true rate of return must be much higher than the stated interest rate. He wanted to know whether I had developed a calculator that would allow him to measure the “true rate of return”.
The idea that since home mortgages are front-end loaded, lenders must be earning more than the stated interest rate is an old myth that has not a shred of validity, but it never goes away.
Most mortgages written today call for equal payments that
fully amortize the loan. This necessarily means that in the
early years most of the payment is interest and in later
years most of it is principal. But the years of high
interest payments are the years when the loan balance is
high. If the interest rate on a 30-year $100,000 loan is 6%,
in month one the interest payment is .06/12x100,000 or $500.
After 25 years, the interest payment is down to $155 but
that’s because the balance is then only $31,000. The dollars
of interest earned in month one, and the dollars of interest
earned in month 300, are both equal to .005% of the amounts
owed in those months.
No, I don’t lend anywhere. The reader who asked this saw my name on a web site called Behance in South Africa where a scamster from Nigeria who calls himself Jack Guttentag promises a “Financial Solution For Those in Need of HELP”. At various times he has operated under my name in real estate-related sites in Laos, Ecuador and Canada. His game plan is to offer loans at very low interest rates to people whose capacity to repay he makes little effort to assess, charging an upfront fee but never delivering the loan.
I know he is from Nigeria because in Laos a potential victim in his pipeline contacted me by mistake – a fortunate mistake for him because I saved him from paying the fee. That potential victim had received official looking documents by the scamster and one of them allowed me to trace him to Nigeria.
If any reader has an idea about how to stop this guy, I would love to hear it. But don’t tell me to contact the web site because there is no way to contact whoever manages the site for any purpose other than posting and responding to ads. And don’t tell me to contact the Nigerian authorities, because that would be an exercise in futility.