1

How is the interest and principal payment calculated when mortgage has already missed one payment? Are the new payments calculated off the new balance (non-amortized balance) or the original scheduled balance?

For example: 100k mortgage, 360 terms, 5% nominal rate, monthly payments

Period   Payment     Int    Princ     Balance
0                                    100,000.00 
1         536.82    416.67  120.15   99,879.85 
2         536.82    416.17  120.66   99,759.19 
3         536.82    415.66  121.16   99,638.03 
4         536.82    415.16  121.66   99,516.37 
5         536.82    414.65  122.17   99,394.20 
6         536.82    414.14  122.68   99,271.52

Now consider 6th scheduled payment (last in table), and consider that this was missed. Therefore, actual situation in 6th period

Period   Payment     Int    Princ     Balance
6         Missed    Missed  Missed   99,394.20 <-- this is same as 5th period

How is payment for 7th period calculated? Which of the following is most appropriate?

( a ) scheduled payment for period 7 (= 536.82) 
      + missed payment for period 6 (= 536.82) 
      + late fee 
( b ) new payment calculated of Balance 99,394.20 amortized over 353 terms (= 538.15) 
      + missed payment for period 6 (= 536.82)       
      + late fee
( c ) payment calculated of balance 99,394.20 over 353 terms (= 538.15)
      + missed payment for period 6 compounded ( =(1+5/1200)*536.82 )
      + late fee
  • I can rule out (c) in US since as per US Escrow Rule, you can't charge interest on interest. – toing Oct 29 '18 at 0:05
1

There are a few ways that a missed payment disadvantages the lender:

  • not getting the amount (addressed by the period 6 catch-up payment);
  • opportunity cost due to not being able to use the amount (addressed by the interest component of a late fee);
  • hassles of having to make alternate arrangements if the lender was relying on the income to make their own payments (addressed by the fixed component of the late fee).

So your first suggestion sounds most likely, but to find out how missed payments are actually handled, you'll need to refer to your mortgage agreement.

It's possible that there are options for spreading the payment over a longer mortgage period, or that the whole mortgage must immediately be paid in full (not as likely with a single instance of default, but it depends on what you've agreed with the lender), etc.

  • Thanks for your answer. I was thinking (b) is more likely since if I were to reverse this situation and pay additional principal in any period, then new payment is based off new reduced balance. Likewise, here if I miss a payment, new payment should be based off the principal thats not amortized. – toing Oct 29 '18 at 0:08
  • It's not fully symmetric. Think of it the other way round: imagine getting 2 salary payments in 1 pay period. If you manage your finances well, this isn't an inconvenience, so you probably wouldn't mind whether your boss skips the next salary period or just pays you less over the rest of the year, so long as the total annual salary stays the same (and next year's salary goes back to normal, etc). But missing a pay period is a lot more serious - you have bills to pay and might be relying on the income to pay them. So it's not just a case of 'pay me a bit more in the next few pay packets'. – Lawrence Oct 29 '18 at 0:21
  • Having said that, maybe you have enough of a cash buffer that you can ride out one payment. So if the boss simply pays you a 'late fee' for the inconvenience and then spreads out the missed payment over the rest of the year, maybe you wouldn't mind. The point is that it comes down to your situation and agreement. Same with the mortgage. In any case, it would be unfair for the one who defaults to get to call the shots on how the default is to be remedied, and it would be unfair to give the other party free rein on penalties. The contract helps keep remedies within expected bounds. – Lawrence Oct 29 '18 at 0:27
  • Thanks again. Would you happen to know what's a typical case for standard fixed rate mortgages offered in U.S.? I dont have my mortgage currently and was trying to get my head around math of taking out mortgage and some contingencies. – toing Oct 29 '18 at 0:29
  • Sorry, I'm not familiar with US mortgages. But you should be able to ask potential mortgage providers for their standard contracts so you can determine whether you want to be bound by them. – Lawrence Oct 29 '18 at 0:31

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