"I'm closing tomorrow on a 30-year fixed-rate
mortgage at 5.375 percent for $161,000. In looking at the HUD1 closing
statement, I found that the prepaid interest was calculated on a 360-day basis.
Should they not be using a 365-day year in the calculation? Won't I be paying
thousands of dollars of additional interest? Shall I rescind this loan?"
probability, that won't be necessary.
one assumes that there are 360 or 365 days in a year only affects the interest
a borrower pays when interest is calculated daily. On your 5.375 percent
mortgage, for example, the daily rate is .01493 percent if 5.375 is divided by
360, and.01473 percent if 5.375 is divided by 365.
difference is relevant to the calculation of prepaid or per diem interest,
which is interest for the period between the loan closing date and the first
day of the following month. That calculation uses a daily interest rate. If
your $161,000 loan closed on Feb. 15, 2005, for example, you would owe 14 days
of interest to March 1. (If you had closed on Feb. 15, 2004, however, you would
have paid for 15 days because February had 29 days in 2004.)
not involve a lot of money. Using 360 days, the 14 days of interest would
amount to $336.53, while using 365 days it comes to $332.01, for a difference
of $4.52. This is not a reason to rescind your loan.
have a standard mortgage, that is the end of it. Interest is calculated
monthly, so your annual rate of 5.375 percent is divided by 12 to get a monthly
rate of .4479 percent. The assumed number of days in the year, and whether or
not it is a leap year, has no impact on your monthly interest payments.
are some so-called "simple-interest mortgages" on which interest is
calculated daily throughout the entire life of the loan. On these loans, the
difference between using a 360 and a 365-day year in calculating the daily rate
is significant because the daily rate is applied every day for the life of the
loan. On your loan, it would amount to more than $2,000 over 30 years.
whether interest is calculated monthly or daily is not a required disclosure
under Truth in Lending. I have heard from several borrowers who were surprised
to discover they had simple-interest mortgages, but I don't know that they were
deceived about it. The chances that you have one are small, but you can relieve
your anxiety by checking the section of the note that explains how interest on
your mortgage is calculated.
Advantage in 52 Payments a Year?
"I have been following your advice by increasing my
monthly payment by one-twelfth. My lender has suggested that I instead switch
to a weekly payment plan, for which they charge $1 per payment. Would this plan
result in my paying off my loan sooner?"
because weekly payment plans do not involve any additional payments. Your
monthly payment is multiplied by 12 and divided by 52 to get the weekly
payment, so you make the equivalent of 12 monthly payments a year. When you
increase the monthly payment by 1/12, you make the equivalent of 13 payments a
make the two schemes comparable by increasing the weekly payment by one-twelfth
as well. Then you would make the equivalent of one extra monthly payment a year
in both schemes. If you did that, you would pay off a little sooner using the
weekly payment scheme, provided the weekly payments are applied weekly –
meaning that the balance is reduced every week. Ask the lender whether weekly
payments are applied weekly, or whether they are held until month-end.
"I was told that the weekly payments are held in a
special account, and on the first of every month a withdrawal is applied to the
that there is no interest savings to you in making weekly payments. And since
the $1 payment fee is added to the balance, your loan will pay off less quickly
under the weekly payment plan than under the monthly payment plan you are using
now. The only possible benefit is the budgetary discipline that might be valued
by borrowers who pay weekly.
writer is Professor of Finance Emeritus at the Wharton School of the University
of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
What's your opinion? Send your Letter to the Editor to