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I have a 30yr mortgage with a principal balance of $400k at 7% interest rate. The monthly interest is around $2333.

On April 19th I made a principal payment of $200k. Starting May 1st, I see the interest is recalculated as $1166.

Question - what happened to the interest from April 20th to May 1st? Since the principal payment was applied on April 19th, shouldn’t I get a credit for the 11 days in April from 19th- 30th?

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  • I think the answer by @DStanley is wrong, though the right answer may vary from jurisdiction to jurisdiction and even loan to loan. I think the bank will calculate the interest by dividing 7% by 360 to get to a daily rate (which is the daily equivalent of the monthly rate). The interest for April will be ($400k x (0.07/360) * 19) + (200k x (0.07/360) x 11). (Interest is calculated this way for initial odd days.) I would be shocked if regulators allowed a lending institution to charge interest on an amount that was not outstanding. I could be wrong. Can you get a statement from your bank?
    – Karl
    May 17 at 21:29

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The interest portion of your payment is calculated as the outstanding principal amount times the monthly interest rate (7%/12 or 0.5833% for you). On May 1st, your principal balance was ~$200k after the extra principal payment (I'm assuming you made the normal monthly payment to cover the interest). So the next month, your monthly interest portion will be $200k * 0.5833% or 1,166.

Mortgage interest is generally computed monthly, not daily (unlike consumer credit cards whose balance changes day to day), so whether you made the extra payment on April 2nd or April 30th, the effect on your mortgage would be the same. Your normal April payment covers the interest due for April, and the May payment will cover the interest due for May using the new principal balance.

I sympathize that you got charged a full month of interest when the balance was cut in half in the middle of the month, and you can ask the bank if they will give you credit for the mid-month payments, but I suspect the terms of the loan loan that you agreed to only compute interest monthly regardless of the timing of the payment.

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  • Ouch! That would be a $700 bummer. I am waiting for the bank’s response. Is the interest for the month typically charged upfront? Or is it the April month’s interest that we pay on May 1st?
    – J R
    May 14 at 13:36
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    Yeah, but it's $700 over the remaining life of the loan - at best they would just reduce the principal by another $700 (they're not going to write you a check). It would save you about $4 a month in interest. Interest is generally charged in arrears, meaning your May payment would cover April's interest.
    – D Stanley
    May 14 at 13:42
  • Correction: 12th root of 7%, not divide by twelve.
    – keshlam
    May 14 at 13:46
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    Yeah. This is a ‘recast’ process and am paying an additional $500 fee for that too.
    – J R
    May 14 at 13:54
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    @keshlam: That would be the difference between APY and APR. Monthly interest is 1/12 of APR and 12th-root of (1 + APY), the two calculations are equivalent
    – Ben Voigt
    May 15 at 16:31

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