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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, country: Mortgage

Period   Payment     Int    Princ  Remaining 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 <- 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 ) payment calculated of Balance 99,394.20 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
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  • $\begingroup$ What country/jurisdiction does this relate to? $\endgroup$ – Magic is in the chain Oct 30 '18 at 18:08
  • $\begingroup$ Sorry, I should have added this in description. Let me add it now. Its USA $\endgroup$ – toing Oct 31 '18 at 0:08
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In the case of failure to pay a fee, the problem is not financial calculation, but compliance with the obligations of the loan contract. Therefore, the viable option is the one you designate as 'a)', since the debtor pays the delayed installment, the late payment surcharge and the new installment of the loan that will be due, to get up to date with the payment plan.

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  • $\begingroup$ Thanks a lot for your reply. If i may ask further to clarify - so if i make missed payments plus current payment plus late fee, am I back to original amortization schedule? I am getting confused here since higher balance in delinquency should invite higher interest payment resulting in a slippage from scheduled balance (as payment is constant) i.e. even when mortgage becomes current again, its balance may be higher than what was originally scheduled for that period ? From what you are saying, looks like higher balance in delinquency still accrues same interest from amortizations schedule $\endgroup$ – toing Oct 31 '18 at 0:13
  • $\begingroup$ a) am I back ... Yes; b) your second question is a financial question that has been analized in a general way. In your specific case what matters is that you pay quickly what you owe. Remember that it is in the loan contract that mechanisms are established to resolve the payment arrears or the lack of payment of one or more installments of a loan; c) The penalty interest rate for delinquency is generally higher than the interest rate of the loan. Additionally, your payment arrears may affect the rating of your current loan or that of future loans. $\endgroup$ – djnavas Oct 31 '18 at 2:19
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In the US, I believe the correct treatment is option a. Don’t think capitalisation of fees or missed payment is allowed. And if you are worrying about the missed payment not earning interest, don’t forget the late fees are big enough to cover that plus a lot more. And to add to that, you can’t charge fee on fee either- so called ‘pyramiding’ is not allowed. Individual customers can always ask the banks for help (reinstatement or repayment plan) if they have missed payment though.

In the UK, the regulator, FCA went to town with this issue a couple of years ago, leading to customers whose shortfalls has been capitalised receiving compensation.

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  • $\begingroup$ Yes, i was concerned exactly about higher balance in delinquency throwing off more interest. And as a result, even after making missed payments, balance not returning back to original schedule. But looks like, interest is calculated on original scheduled balance (and not the actual one after missing payment). Perhaps, late fee makes up for everything. Thanks a lot! $\endgroup$ – toing Oct 31 '18 at 12:37

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