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Almost everybody reading this article are either
making payments on real estate loans or, perhaps,
receiving payments on real estate loans. If you’re
making payments on real estate loans you’re probably
sending the payment in every month and getting a
receipt showing monthly interest and principal figures
or, at least an annual statement showing amounts paid
to interest, principal and unpaid principal balance.
If you’re paying to a conventional lender, most
people “ASSUME” that the lender’s figures are
accurate. With a conventional lender the figures
USUALLY are accurate unless there has been a change in
the servicing company or, perhaps mistakes in
computing adjustable rates. If you’re paying loans
to a private party the calculations of interest,
principal and remaining balances are much more likely
to be imperfect. Even if the private party loan is
being collected by a bank or servicing company, the
figures can easily be defective.
Years ago I looked into a payoff of a private party
loan for a client of ours and discovered a discrepancy
in the approximate amount of $5,000. The lender had an
official looking spread- sheet. We ran the figures for
the customer and, “voila” a big
discrepancy.
Figuring the interest and pay down on a monthly
payment is easy. You do not have to trust the lender’s
figures. Any real estate professional can furnish you
with an amortization schedule that will show you the
breakdown for the life of your loan. On the other
hand, you can easily double-check a lender’s
figures.
In the situation I described above, the lender was
figuring the interest DAILY rather than monthly. Most
California mortgage payments are figured on a MONTHLY
basis. Banks sometimes use a daily interest
calculation.
On the assumption that your payment is figured on a
monthly basis, the calculations are fairly simple.
Every month you figure the interest based on the money
you still owe from the previous month. Therefore, lets
assume that you borrow $100,000.00 at 8% interest on
the first of June with a monthly payment of $733.76
(30 years). On July 1 your payment is due which pays
interest FROM June 1st to July 1st. The
calculations go like this: $100,000.00 times 8% equals
$8,000.00, i.e. one year’s interest. Divide that by
twelve to arrive at one month’s interest ($666.67).
Since the monthly payment was $733.76 and the interest
charge was $666.67, the difference ($67.09) is the
amount of principal reduction for that month. The
remaining principal balance after the first month
payment would be $100,000.00 minus $67.09, equals
$99,932.91.
Figuring the second payment would be exactly the
same way, i.e. $99,932.91 times 8% equals $7,994.63
(one year interest), divided by twelve, equals $666.22
(one month’s interest). Subtract this from the
monthly payment of $773.76 to get a principal
reduction of $67.54 (second month). The remaining
principal balance after the second payment would be
$99,865.37. The first five payments would look like
this:
|
Starting balance |
Interest rate
|
Monthly payment
|
|
$100,000.00
|
8%
|
$733.76
|
|
Due Date
|
Interest |
Principal
|
Balance
|
|
July 01, 2000
|
666.67
|
67.09
|
99,932.91
|
|
August 01, 2000
|
666.22
|
67.54
|
99,865.37
|
|
September 01, 2000
|
665.77
|
67.99
|
99,797.38
|
|
October 01, 2000
|
665.32
|
68.44
|
99,728.94
|
|
November 01, 2000
|
664.86
|
68.90
|
99,660.04
|
|
There really is no mystery to your monthly payments as long
as you can do a little simple multiplication and
subtraction.
Now that you can figure this “mysterious amortization”,
let me suggest the wonders of OVERPAYMENT. Based on the
assumption that you will be keeping the property for more
than a few years, and on the further assumption that the
interest rate is more than 7-8%, I always recommend an
overpayment either monthly or once in a while. If you
overpay your mortgage payment, the overpayment will be
applied to the principal balance. Since interest is charged
monthly, the next month’s interest will be charged on the
smaller balance. As I have stated in a previous column, the
BI-MONTHLY mortgage plan is nothing other than having to pay
one extra payment a year. I am certain that most of my
readers understand this now. In the above example you might
want to pay $800 every month, or $850 if the budget allows.
If you can’t pay extra every month, merely overpay a lump
sum (with your regular payment) when you get your tax refund
or “whenever”.
Hopefully this article will have taken some of the
mystery out of the amortization process. This should allow
you to double-check your lender once in a while. Double
checking your lender’s figures is very, very important if
you’re paying a private beneficiary who figures these
payments by hand. In my opinion, anybody making mortgage
payments should have an amortization schedule so that they
can compare the lender’s figures to the amortization
schedule.
A further word about bi-monthly mortgage payment plans.
If you have not read my previous column on the subject
and/or don’t understand that a bi-monthly plan equals the
equivalent of thirteen ACTUAL payments in a twelve-month
period, you may send me a self-addressed, stamped envelope
marked “bi-monthly mortgage” and I will be happy to send
you the “V.I.P. method” of accomplishing the same
results, with no $400 setup fee.
Peter Rosenthal
VIP Trust Deed Company |
