Owner Financing - How do I Calculate the Payments?
So you sold your property and took back a mortgage. Congratulations! The buyers seem like nice regular folks and promise to make their monthly payments on time.
Your attorney or closing agent gave you a neat amortization schedule with all the payments listed for each month and how much goes to principal and how much to interest. You even get to collect an extra few bucks if the payment is not received on time.
But what if you don't get a payment for that month? What if the payment is less than you expected - or more than you expected? Now your neat amortization schedule is worthless. How do you calculate these irregular payments? How much is interest? What's the remaining principal balance? What's the total interest received for the year?
Well - easy. If the mortgage is a standard monthly payback, you just take the remaining principal and divide it by the interest rate and then divide the result by twelve. Now you have the interest amount due for that month. Subtract that amount from the payment you received and then subtract the remainder from the remaining principal balance. And there you have it.
But what if the payment you received is less than the interest due for that month? Well - easy. Just subtract the amount received from the actual interest due and add the remainder to the principal balance.
But what if the borrower comes by a week later and gives you more money? Well - easy. Just subtract the entire amount from your remaining principal balance because you have already allocated the total interest due for that month.
But what if you don't get a payment at all for that month? Well - easy. Unless you want to give the borrower the gift of a free month interest, add an amount equal to what the interest for that month should be to the principal balance. In this case, you do not want to add this amount to interest received, because you didn't receive anything!
So you see, it's not so hard. Naturally, you are keeping accurate records of all these payments including date due, date received, amount, interest, principal, penalty (if any) and the balance remaining after each payment. At the end of the year, simply add up all the interest received. You must report any mortgage interest received on your income tax return and are required by law to provide the borrower with a form 1098 Mortgage Interest Statement for tax purposes, so be sure that your figures are accurate.
If all this seems daunting or too complicated, consider LoanShark, a software solution built for people just like you. LoanShark desktop software for Windows(tm) will take care of managing all your incoming mortgage or loan payments as you receive them and do the calculations for you. It will keep a profile of your borrower(s) and also keeps track of other important information you need at tax time.
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