Mortgage payment calculation

[radhak]

This is for a friend. I believe I have found his bank did a miscalculation. Of course he calls me cuckoo .

He took this loan of $40,950 in 2005, for 15 years, at 7.37% fixed APR.
(I made him call them and confirm these numbers just now).

He has been paying a constant monthly amount of $282.84 for all these years.
Of this, as of now, (they told him) the interest is $222, and $60 is principal. Balance left over today is around $38000.

According to the Excel formula PMT, his monthly payment should have been a constant $376.59, in which interest is $206.70 and principal is $169.90 (this month, as the ratio changes every month).
The formula is PMT ( 7.37% / 12 , 180, 40950 ).

I check with a couple of sites online, and they match Excel.

So what's going on? what went wrong, and where? Is he really underpaying, and it might come back to bite him? Or is there any other way to calculate this?

I did some what-if compares, and this could have happened if somebody had mistakenly typed in $30,755 in the original formula leaving everything else the same. But then the balance today would show much less!

Or, if the APR was wrongly entered as 3.00%, other things stay same. Again, the balance would be much less today.

Or am I really cuckoo?

He does not want to find out that he should really be paying more, so he's already left for home .

[DaveS]

I'd say that he thought he got a 15 year mortgage, but actually got a 30.

[docrowan]

On my financial calculator $40,950, 7.37%, and 30 year duration computes to a $282.69 payment. Near enough that I think that's where the problem is.

I agree with you, somebody goofed and your friend is going to get bitten. I am quite sure that the bank will have a way to get their money written into the contract, despite the fact that they (apparently) made an error.

[radhak]

I'd say that he thought he got a 15 year mortgage, but actually got a 30.

Maybe that...that is, somebody did the original numbers with 30year and plonked them down somewhere, and then changed the years to 15 but did not recalculate...

Because his records do show 180 months now; loan maturing 2020!

[radhak]

On my financial calculator $40,950, 7.37%, and 30 year duration computes to a $282.69 payment. Near enough that I think that's where the problem is.

I agree with you, somebody goofed and your friend is going to get bitten. I am quite sure that the bank will have a way to get their money written into the contract, despite the fact that they (apparently) made an error.

$282 x 180 months = $51,000

$282 x 360 months = $101,000

That's a difference of $50K !!! Wonder how they'd make it stick? Would make a heck of a lawsuit.

But of course, if he does not do anything, nobody might ever know... maybe I need to go fix my lawnmower now and forget i brought this up ...

[jackellis]

This is a tough one. The bank screwed up by calculating the payments incorrectly. Your friend trusted them (he forgot about the verify part).

The bank has no incentive to make adjustments because the interest rate is pretty favorable for them. Your friend has been underpaying the 15 year amortization schedule, which has left him with $100 more per month in his pocket than if he'd paid according to the 15 year amortization schedule.

If I were him, I'd see if I could refinance that mortgage ASAP and get the interest rate down about 2 percentage points.

Of course, if he can deduct the mortgage interest, the after-tax hit is not quite as bad as the case where he can not deduct the interest.

[Uncle Cracker]

Have him consult a real estate attorney...

[LinuxRandal]

With all those wierd mortgages that happened, I would make sure he isn't on a biweekly mortgage.

[LCHIEN]

interesting issue.
What the outcome for your friend depends greatly upon what the mortgage contract says.
If it says he makes monthly payments of 272 for 180 months and he's done then he's got a deal! if it says he is done when the principal and interest add up to so much then he is probably screwed into a 360 month loan.

It's hard to imagine that things will add up correctly in the contract. as it stands he's saved a lot of money but he owes way more than he thinks. I don't think there's a win-win situation. I'd contact a good attorney before contacting the bank. Refinancing may eventually be his only way out, that should save him quite a bit of money in payments.

[radhak]

Issue resolved - and it's bad!

Well, the bank always wins. Even when it comes to tricky or sneaky behaviour, the bank is one up!

So we dug out his mortgage papers (that is his 2nd mortgage, btw) and pored over the details.Buried deep inside is a small grid that proclaims

Your payments will be :

    Number of payments            Amount          Due starting
   --------------------------------------------------------
              179                     282.84          5/29/2005
                1                  31,025.05          4/29/2020
   --------------------------------------------------------

There you have it! The sneaky b**ds had unilaterally put a schedule of underpayment so that that a remainder of $93 was unpaid each month, accumulating interest, all to be paid as one single lumpsum on the last month of the 15th year!!!

This way, the total amount repaid works out to $81,653.41; ie, almost $40,000 of interest instead the more reasonable $26000!!!

After thinking about it some, I feel there's not much he can do. Of course he pay off the $4000 now and start paying the real amount ($376) now onwards, or he could start paying $421 to offset the past underpayment.
(They did tell him that any payment above the $282 is applied to the principal).

He claims there was no indication why this strange payment schedule was given him, and he had no clue about it till now. Go figure.

[Tom Slick]

does he have prepayment penalties?

[LCHIEN]

Nasty balloon payment!
Obviously No one read the document, the lender or the borrower, before signing.
The computer generated it using the bad parameters given it.
your solutions i think would be the only ones he has.

[DaveS]

If it were me, I think I'd try to use it as leverage for getting a free refinance.

[gjat]

I would think the Bank would claim that he signed for a 15 year ballon loan and he is locked in to what he signed for. He has no recourse because his only arguement is his verbal claim that he did not 'think' he signed for a 15 year balloon.

Probably what happened is he talked to the bank about a 15 year mortgage, discussed a lesser payment, the bank offered a 15 year balloon, and he fixated on the 15 year and payment parts only. This is the likely scenario for many people who got financing the last 5 years.

I would recommend that he contact a different bank and re-finance if he can afford a higher payment, or if he really feels he was duped, to contact a lawyer.

[Sparky2002]

This how my second mortgage was set up as. Amortorized as a 30 year, but actually a 15 year ballon. If you did not know that would suck at payment #180. I recalculated from the start and pay the extra money monthly to avoid that last payment.