Redemption after a foreclosure in Alabama includes the obligation to pay interest on the foreclosure auction price plus other items such as the value of permanent improvements performed after the foreclosure. What is the interest rate? It is not always the 12% or the 7.5% you might think!
First of all, the interest rate is specifically tied to the judgment interest rate in Alabama Code Section 8-8-10. That statute says:
- (a) Judgments for the payment of money, other than costs, if based upon a contract action, bear interest from the day of the cause of action, at the same rate of interest as stated in the contract; all other judgments shall bear interest at the rate of 7.5 percent per annum, the provisions of Section 8-8-1 to the contrary notwithstanding; provided, that fees allowed a trustee, executor, administrator, or attorney and taxed as a part of the cost of the proceeding shall bear interest at a like rate from the day of entry.
- (b) This section shall apply to all judgments entered on and after September 1, 2011.
Before 9/1/11, the rate was 12%.
What nobody pays attention to is the part of the statute that says, “at the same rate of interest as stated in the contract…”
In other words, if the promissory note that resulted in the foreclosure was a 3%, then the redemption interest rate is 3%.
Yes, that’s what I said. That’s what the cases say. See, for example, Southeast Enterprises, Inc. v Byrd, 720 So.2d 873 (Ala. 1998), plus cases cited there and later cases found by Shephardizing it. Here is what the Court said in Southeast Enterprises, at pages 876-877:
- “This language provides for application of the contract rate or, if there is no contract rate, a fixed rate. When used to compute a redemption price, § 8-8-10, like former § 8563 [Ala. Code 1923], prevents windfalls by providing mortgagees only the amount of interest they contracted for with the mortgagor, not a higher fixed rate. Without clear direction from the Legislature, we will not provide a bonus of interest in excess of that contracted for by the mortgagees. On remand, the trial court should apply the contract rate of interest, not the 12% rate, to those portions of the redemption price composed of debts for which the interest rate is set by contract.”
In my experience, many promissory notes have a post-default interest rate of 18% or more. That might be something to check out when doing your due diligence. The redemption interest rate is currently 7.5% or the contract rate, whichever is less. “In this state, one seeking redemption from under a mortgage must pay legal interest, or the rate fixed by the contract if it be less than the legal rate.” Lytle v. Robertson, 233 Ala. 161, 164, 170 So. 484, 486 (1936).
Investors, be careful what interest rate you quote for a redemption! If you quote too much, you could land in litigation. Quote too little, and you are leaving money on the table.
Redeeming parties, do not overpay. Be aware of your rights.