Expert: Jay Denit - 10/22/2007

Question
QUESTION: Hello, Jay...In 1996 we sold my dad's house (in Spokane) to a young couple and carried the mortgage on a 15 yr. note.  The buyers had some financial issues in 1998-99-00, and we didn't get any payments on the note for much of those years.  Recent years have been better, but they usually miss a month or two in any given year (and are sorry about it, etc.).  These are otherwise nice people, and we have been pretty forgiving.  However, we have just been tacking on the missed payments at the end of the note, and I am not sure that is the right way to go.  Should we just re-figure the remaining balance, including those missed payments, and re-amortize the whole thing, or is there a more simple way to do this.  Many thanks for your time.

Lou

ANSWER: Hi Lou,
You have been forgiving! I'm not sure I would be as lenient as you.  When I carry note's, I have them sign a Deed of Trust/mortgage pledging the property as collateral for missed payments.  Basically saying if you miss a payment, you owe me  late fees and interest on the late payment and if you don't pay, I have the right to start foreclosure.  

My point is, I would expect the missed payment the next month rather than giving any concession and letting it stretch out over years.  I want to see you get your money, so I would notify them in writing that you have noted their missed payments and they have not be forgiven.  I would give them the option of setting up a separate payment plan to pay off the overdue debt.  Any way you handle it is fine (tack on payments at the end or recast the loan with the missed payment figured in), they just need to know that you are serious about collecting the money that is owed to you.

Good luck!

---------- FOLLOW-UP ----------

QUESTION: They know we're serious...and that the "missing money" is certainly owed. However, because some of the owed $$ occurred early in the mortgage amortization process, and some later, I was wondering about the sliding intgerest rate scales over time and how to take that into effect...or just ignore it.
Thanks again.

ANSWER: I'm not familiar with "sliding interest rate scales".  Was it and adjustable rate loan?  You can't factor in inflation if that's what you are asking.

I'm assuming the interest rate at the time of the loan was locked in, so unless otherwise agreed upon.  The interest rate is locked for all 15 years and that can't be changed to reflect current market conditions.

Hope that answered your question.

---------- FOLLOW-UP ----------

QUESTION: I won't bug you again...just to clarify: I meant that if you amortize a loan, most of the first few years is interest and later it is principle. Some of the first missing payments were mostly interest, the latter mostly principle.  I don't suppose there is any way to smooth this disparity out when you re-amortize a replacement note to include the missing payments.  Not a big deal either way.
Thanks again,

Lou

Answer
Ahhhh...I see what you are saying.  That mainly has to do with the accounting on your end.  The simplest way would be to take the total amount owed, including missed payments, and recast it over the remainder of the loan ~5 years.  Once you get that new payment your CPA could best advise you about how to apply the interest versus principle for the remainder of the loan period.  I would do it just like it was a new ~5 year loan with most of the first payments going toward interest.

Simply put, there isn't a simple way for it all to make sense :)