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Exact is not Exact

The 365 day year Exact day monthly payment mortgage has already been covered. There are some lenders that say they have an exact day monthly payment mortgage but neglect to mention it is based upon the 360 day Bankers year. Again a 12% rate is used so that all the examples are consistent on this site for comparison purposes. If you had a traditional mortgage at 12% and monthly compounding based upon the 360 day year (Bankers year in the USA) the monthly interest factor is 1% and the monthly interest cost at the end of the month, for a loan with a balance of $100,000 at the begining of the month, would be $1,000 (that is .01 x $100,000= $1,000). I will use a 31 day month as an example as it covers 7 out of 12 of the months in a year which represents more than 58% of your payments.

If the lender was using the 365 day method the interest cost at the end of the 31 day month would be $1,019.28

If the lender was using the 360 day method the interest cost at the end of the 31 day month would be $1,033.51

There are two ways to know for sure which of the three interest calculation methods the lender is using. An amortization schedule would show the difference on the very first payment. The lender could provide you with the effective interest rate, EIR, minus all the APR smoke and mirrors. The latter is difficult to attain because the disclosure laws are confusing to most people and most people do not understand compounding and the real value of the EIR.

(Screenshot 1)

Below are the monthly interest costs on a $100,000 balance owing for the 28, 29, 30 and 31 day month utilizing 365 and 360 day years. These are significant differences and you should know about them as it is your money.

(Screenshot 2)

 

 


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