Primary marketInterim Interest on a Refi
Question: I recently refinanced my mortgage through an internet mortgage company and found out that I paid interest to both lenders for five days. The new lender funded the loan on January 30th but the old lender didn"t clear the loan from its books until February 4th, which meant I had to pay interest to both lenders during that period. Is this legal?
Answer: First let me answer your question. It"s not legal for lenders to over charge a borrower in interest. But if I examine your refinance carefully, I doubt if there was any wrongdoing. Let me explain.
First, it"s important to know that by law, there is a three day "right of rescission" period after your settlement date. This means that the funding date on all refinance transactions on owner-occupied property occurs three full days after your settlement date. This law gives the borrower a chance to back out of the refinance. Your actual settlement date was probably on either January 24th or January 25th, depending on whether your lender counts Saturdays as a rescission day. This would mean that your loan would fund on January 30th. And the interest clock on the new loan would start on January 30th.
The trouble can start here. Since the new loan isn"t funded until January 30th, the old loan won"t get paid off until January 30th, at the earliest. In a perfect world, settlement companies would collect interest through the 30th of January because that"s when the old loan would be paid off.
But it"s not a perfect world. Because of annoyances such as weekends, the funding date can occur not three days after you sign the papers, but perhaps five or six days after the actual settlement date. You can"t pay off a loan on a Saturday or Sunday.
Now it gets complicated. The law in Virginia, for example, allows 48 hours for the new loan to be recorded. Technically, this could mean that the old lender wouldn"t actually get paid off until two or three days after the funding date. In your case, January 30th is a Thursday. Assuming the new lender funded the loan after 2PM, the settlement company would have 48 hours to pay off the old loan. Because of the weekend, the 48 business hours would be over by end of business Monday, February 3rd, resulting in a recorded payoff on the 4th.
I hate to say it, but your scenario makes sense.
It gets even more complicated. We"ve established that your old loan wasn"t paid off until two business days after the funding date, which is three days after your settlement date. (Are you following me so far?) This would mean that the settlement company should collect five days" more interest over the settlement date. This would cover the three day rescission period plus the two days to record. But you can see that five days would be insufficient because of the weekend.
Most settlement companies will collect up to ten days interest after the settlement date.
Here"s why. If for some reason the old loan doesn"t get paid off on February 4th, the lender will continue to charge interest until it receives the payoff. And the settlement company is on the hook for whatever that number might be. So they collect enough interest to make sure there"s enough money to cover the actual payoff.
And believe it or not, stuff happens. The recent snowstorm that pounded the East is a good example. A lot of payoff checks that were sent via overnight mail were delayed because of the weather. If the payoff isn"t received, the bank will charge another day of interest.
As I said, it"s against the law for lenders to collect more interest that"s actually due. If the old lender receives a payoff amount that is in excess of what is owed, it must refund you the money. So in your case, if the settlement company collected interest to cover the old loan through February 9th, and the old loan was paid off on the February 4th, the old lender will refund you the difference. In other words, if too much interest is collected, the homeowner will get it back.
Let me now summarize: Lenders are not allowed to over charge interest. But at the same time, refinancers usually pay between two and five days double interest depending on the weekend days and the time it takes to fund and record a loan.
One last thing, and this comes from personal experience. When you receive a check from the old lender that represents over collected interest, make sure it is accompanied by a detailed explanation of how the amount was calculated. If there"s no reconciliation, call the lender and have them provide you with one so you know what"s going on.