How to calculate remaining mortgage balance for payoff

blackdogOctober 23, 2010

It's the fine details that confuse me! Here's the simpler of my two problems, the second mortgage. Began Oct 7, 2001, $34,000 loan at 5.25%, 30 years, paid monthly. Will pay this off Nov. 8, 2010, when I get another private mortgage. My amortization schedule shows remaining balance of $28,568.12 after my October 7th payment (of $62.49 principal and $125.26 interest). The corresponding figures for the November payment are $28,505.35 balance after a $62.75 principal and $124.99 interest payment. I understand that interest is paid in arrears and principal in advance. So on November 8th, do I simply owe the lender the $28,568.12 balance plus $124.99 interest? Or do I use the interest figure from the Oct figures? And do I owe him for that one day, the 8th, since payments are due on the 7th? Do I need to somehow prorate the principal? Answers to these questions will help me figure out the first mortgage, which I pay on the 13th of the month, and is thus more complicated since the payoff will be on the 8th.

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brickeyee

Call the lender and ask for a payoff amount.

    Bookmark   October 23, 2010 at 2:23PM
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blackdog

Thanks, but this is a private mortgage held by a friend. Even it were a commercial mortgage, I would want to be able to verify whatever number they came up with--given that so many mistakes are made. I don't see anything on google about how to deal with the extra days in a month beyond the due date, or with question of balance principal being prorated.

    Bookmark   October 23, 2010 at 3:00PM
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dave_donhoff

Hi Blackdog,
Its typical to figure per diem interest costs when determining your final payoff figures... but not principal.

Hope that's helpful.
Dave Donhoff
Leverage Planner

    Bookmark   October 23, 2010 at 6:41PM
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brickeyee

"I don't see anything on google about how to deal with the extra days in a month beyond the due date, or with question of balance principal being prorated."

The balance is not "pro rated" it is amortized.

Each payment goes towards interest for the preceding month, and the remaining portion of the payment goes to reduce the principal.

When calculated correctly the payments will result in the principal reaching zero (with some rounding errors) by the last payment.

The last payment is often slightly different (often lower) to correct for the rounding errors in all the previous payments.

Daily interest is computed by determining what the principle remaining is and dividing by the number of days in the payoff month.

This is the pro-rated per day interest expense.

    Bookmark   October 24, 2010 at 9:55AM
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blackdog

Thanks everyone for the tips. So in the case I outlined in my first post, would you agree that my final payment should be the $28,568.12 balance remaining after my October 7th payment, plus $124.99 interest?
In the theoretical case that my payoff date were, let's say, November 10th, I guess I would then pay the usual 7th of the month p&i payment and the final payoff number would be $28,505.35 plus the two days of interest for the 8th and 9th of November--correct?

    Bookmark   October 24, 2010 at 4:25PM
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brickeyee

"October 7th payment"

Payments are normally due on the first of the month, and that is the date used to compute the interest.

If the note calls out the 7th you would use that day.

    Bookmark   October 25, 2010 at 9:01AM
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clg7067

Generally, you will owe for the extra day.

I understand you are not making the Nov 7 payment, so you will owe:

28,568.12 plus
interest for "October" 124.99 plus
one day interest 4.18

Note that 28,568.12 * .004375 = 124.99

28,568.12 + 124.99 = 28,693.11

28,693.11 * .004375 / 30 = 4.18

I divide by 30 because it is allowed to use a linear interpolation to approximate a "small" period.

Total you owe is $28,697.29

    Bookmark   October 25, 2010 at 2:41PM
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brickeyee

"I divide by 30 because it is allowed to use a linear interpolation to approximate a "small" period. "

You divide by 30 for a typical mortgage because it is compounded monthly.

If you had daily compounding (AKA 'simple interest') you would compute it that way.

    Bookmark   October 25, 2010 at 4:13PM
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blackdog

Thanks so much, all the answers have been very helpful. I just seemed to have a mental block with this but I'm unstuck now!

    Bookmark   October 25, 2010 at 8:30PM
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clg7067

"You divide by 30 for a typical mortgage because it is compounded monthly. "

No, you divide 5.25 by 12 because 5.25% is the nominal rate compounded monthly.

Simple interest approximate for compound interest for small periods of time is standard procedure.

I'm an actuary. My specialty is interest theory and life contingencies. I do this stuff every single day.

    Bookmark   November 1, 2010 at 8:17AM
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brickeyee

"No, you divide 5.25 by 12 because 5.25% is the nominal rate compounded monthly.

Simple interest approximate for compound interest for small periods of time is standard procedure.

I'm an actuary. My specialty is interest theory and life contingencies. I do this stuff every single day. "

You may do it every day, but that is not how RE mortgage interest is computed and pro-rated for payoffs.

No one approximates anything.

The interest for the next month is computed based on monthly compounding, than pro-rated for the number of days in the month until the payoff money is received (Fedex pays for itself here most of the time).

There is no "simple interest approximate for compound interest" used.

    Bookmark   November 1, 2010 at 10:38AM
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