How to calculate remaining mortgage balance for payoff

13 years ago

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.

Sort by:Oldest

Comments (11)

brickeyee
13 years ago
Call the lender and ask for a payoff amount.
blackdog
Original Author
13 years ago
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.
Related Discussions
Mortgage Payoff With Retirement Funds
Q
Comments (13)
I agree with everyone so far - ramp up your savings, lower your spending, and do extra payments on the mortgage debt. Please don't take money out of your IRA to pay your mortgage off. At your tax rate, that's really robbing Peter to pay Paul. You have a good start on your investment account. Think of it as you've got half and your spouse has half. You mention your pension, what does your spouse have? We don't need to know, you just need to think about this. Half a million $$ on a 4% draw-down - which is generous, most advisors nowadays advise 3% - is $20K per spouse, before taxes. With tax hikes almost certain to come in the future, what are you estimating as your future tax rate? Have you looked into Roth conversions? Instead of throwing all your bonuses and extra funds into the mortgage, you might get a better return by splitting the money and using some of it to pay the taxes on the conversions each year before retirement. Also, your spouse needs to roll over those 401k's into one IRA. Trust me, if anything happens to her, it's a paperwork headache for the survivor to get that done. It takes time and energy, and when somebody's grieving, it's the last thing one wants to do. But it's a necessity if you don't want the IRS to get involved. I'm going to offer some questions for you to think about because you are at the perfect point to start doing serious retirement planning. The reason you need to figure out if your assumptions are correct for future savings and the best return on spending, is that if those assumptions are wrong or plain bad luck intervenes, you still have time to adjust and make corrections. Have you and your wife sat down to talk specifically about what both of you envision retirement to be? What's your 'bucket list'? What's hers? What do you want to do in retirement? How much will it cost to do those things? For example: I retired 2 yrs before DH did. Our expenses did NOT go down and our income stayed static because we were contributing as much as we could to DH's 401k. But when he did retire, our expenses jumped overall. We have retirement health benefits, so there was no extra cost there. But we wanted to travel locally, and even that required several hundred $$ of clothing and travel accessories. We were able to donate an entire carload of work clothes to charity, which was great for deserving poor folks, but no one was going to pay us for them. That first year we spent almost four months out of twelve traveling through Northern CA and the PNW, mostly car trips but a few airline trips, at a cost of almost $25K post-tax. We do what I consider to be mid-level travel: not budget or RV travel, but not luxury high-end places either. If I were in your situation I would find a certified or registered financial advisor to run some numbers. What will happen if one of you dies? What happens if one of you gets disabled and needs care? What happens to the surviving spouse if death or disability happens BEFORE retirement? Are you adequately insured to mitigate the bigger risks in your life (and it takes some analysis to figure out what those risks are, that might prevent you from achieving your goals)? Do you have enough $$ coming in for a sufficient 'cushion', especially if you intend to maintain two houses in retirement? Do you know what medical insurance will cost for a pre-Medicare senior? What if a serious medical condition happens and one spouse becomes uninsurable, or at least rateable? Can the budget afford the insurance and any needed medications or extra co-pays? How do you plan to handle long term care costs for one of you? For both of you? These kinds of questions are just as important, perhaps even more so, than the simple question of "should I pay off my mortgage with IRA money." HTH, and good luck going forward.
...See More
How to balance priorities??
Q
Comments (15)
>>I'm trying to connect with a fee-only fiduciary planner to weed through this. I'm having a hard time finding someone that is not connected to a business or broker, and who will put my needs first. A CFP (Certified Financial Planner), which is what you're referencing above, IS also a broker. However, since a CFP is licensed to do financial planning and a regular everyday stockbroker is NOT, the CFP has what is called 'fiduciary' responsibility to you as a client. In other words, they have a legal responsibility to handle your money properly, e.g., in your best interests. You do not have to be afraid of a broker any more than you should be afraid of an insurance agent. In fact, most CFPs are both, because good estate planning requires a holistic approach to good financial management, which means a diversified portfolio of assets and adequate insurance. Actually, without substantial liquid assets, I'm not sure why you need an advisor. You already know you're not saving enough money - if you have 20 yrs to retirement you should be saving at least $12K a year in retirement plan contributions alone, exclusive of your regular checking/savings accounts at your local bank. Unless you have the assets, the only thing an advisor can do is tell you, "Yes, ma'am, you don't have enough money to do all three things: support your kid through college, pay off your mortgage before you retire, and save an adequate amount to supplement your Social Security. So why don't you pick the one thing you think is really important, and aim for that first, and let the other chips fall where they may?" An advisor isn't going to tell you what to do with your finances. An advisor lays out a map for you to get from where you are to where you want to be - but it is up to YOU to decide what the goal is. No advisor worth his/her money will tell you what your goals SHOULD be. They know very well that life is a series of choices, some of them just happen to be worse choices than others. If you want to educate your child, that's fine, but you run the sizable risk of having to work forever, which your future health may not support. Financial aid has always been a lot of paperwork, but spending the time to wade through the different options is something I think you can't afford NOT to do. We have some younger friends where one of them has taken nine years to get through college - but she did it on her own, with excellent grades, working part-time and without a single loan. It's been hard on both her and her partner, but we just finished throwing her a huge graduation party and celebrating the great job she was able to find. Interestingly enough, at the age of 28 she is extremely worried about her parents' finances. Seems they haven't saved enough for retirement and their financial/legal affairs are in a haphazard state. So I reiterate, the best gift you can give a child is to get your own financial and legal house in order. I know it's rough, and I wish you the very best of luck in deciding what to do going forward.
...See More
mortgage payoff: let's make it a sticky!
Q
Comments (15)
>>In each case, I would have been much better off to invest when everyone was pulling out. Much better off. Absolutely. It's the "sheep", or if you prefer, the "lemmings" mentality that affects way too many people. One good way to counteract that: realize that anytime the media is screaming Financial Disaster, that the old saw will apply yet again - "This too, shall pass." OJ's suggestion is actually quite a good one. It uses dollar-cost averaging which is to your benefit, especially if you have a 10-20 yr timeline before pulling those funds out. One note, BTW - ANY bank can set up electronic funds transfers to your stockbroker, insofar as I know. It's called an ACH form and the only requirement is that it must be done in the same amount, each transaction. The transactions can be weekly, monthly, quarterly or even annually - just as long as they can be set up once and not changed. To change an ACH, one has to resubmit new forms each time, so this is why the transactions need to be "automatic." However, since you are leaning towards the idea of investing in RE, I would strongly urge you to at least maximize your retirement contributions. Yes, you may miss the absolute bottom of the RE market by a few months (since maximizing your retirement contributions may slow down your cash savings plan), but you NEED that diversification. You will be tying up a considerable chunk of net worth in very illiquid RE, which is rather like owning a huge bond allocation. As you have seen, the return on money market funds and even TIPS has dropped considerably. At this point they are hardly keeping their eyebrows above the inflation rate. Use your own psychology against yourself - since you recognize that you are a bigger risk-taker in your retirement accounts, diversify that portfolio with at least an 80% equity spread, across at least five sectors of the market. Maximizing your contributions will allow you a diversified base for your total net worth, which is in the end even more important than just paying off one mortgage (or even two!).
...See More
Ye Olde Mortgage Pay-off topic
Q
Comments (24)
I have such a love hate relationship with the sorts of articles such as "Never pay off your Mortgage" etc. The benefit is that it gets people thinking, the bad thing is that it paints a narrow, ill conceived, rosy picture that doesn't hold up too well under scrutiny. Life is never so black or white. Several potential fallacies: #1. The assumption that everyone will have other debt in their life. #2. I'd like to find a bank that will give you a 95% 30FRM (as per his example) with out requiring an 80/15, or PMI, etc., all costs which he neglects to account for. #3. If his rosy fellow Ed is out of a job, he'll have no earned income. It's tough to make a deduction from that, so his "after taxes payment" will be readjusted back to original, meaning his $40K will last a much shorter time than this article (which also fails to account for basic costs of living beyond housing) accounts for. Fact is that if either of them are out of work for any amount of time, they're screwed. I'm not sure yet if we'll pay our mortgage of early or not. As per the article's example, our income has increased so that it's not the drain on us that it was 2 years ago. If we do prepay, we'll do it in a lump sum capacity after the point at which it is not longer a beneficial tax deduction to us. Right now we're investing the money that would go to extra payments. -meg
...See More
dave_donhoff
13 years ago
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
brickeyee
13 years ago
"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.
blackdog
Original Author
13 years ago
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?
brickeyee
13 years ago
"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.
clg7067
13 years ago
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
brickeyee
13 years ago
"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.
blackdog
Original Author
13 years ago
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!
clg7067
13 years ago
"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.
brickeyee
13 years ago
"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.

How to calculate remaining mortgage balance for payoff

Comments (11)

brickeyee

blackdog
Original Author

Related Discussions

dave_donhoff

brickeyee

blackdog
Original Author

brickeyee

clg7067

brickeyee

blackdog
Original Author

clg7067

brickeyee

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

How to calculate remaining mortgage balance for payoff

Comments (11)

blackdogOriginal Author

Related Discussions

blackdogOriginal Author

blackdogOriginal Author

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

blackdog
Original Author

blackdog
Original Author

blackdog
Original Author