Amortization and Payment Schedule

The fact that mortgage accounting is based on the assumption that the only days that count each year are the first day of each month, there is a rigidity to the payment schedule. Other factors also contribute to the rigidity, and the consequences it introduces for amortization and monthly payments.

Though payments are due at the first of the month, there is a grace period that allows payments to be slightly late without negative consequences. The period is generally 15 days, and the rule allows a payment received on the fifteenth day of the month count in exactly the same way as one received on the first day. However, payments received after the fifteenth day incur a late penalty of four or five percent.

When a borrower submits a payment greater than the regularly scheduled amount, the extra money is applied to the remaining loan balance. If this extra money is received before the fifteenth day of the month, the principal reduction is credited to that month. If it is received after this date, it may be credited to the next month instead, depending on the terms of the loan.

These payment rules constitute an advantage for many borrowers. They allow them to keep their money for a few extra days each month, letting it earn interest, or even help them put their payment schedule in synch with when they get paid each month.

However, the rigid schedule can produce a slippery slope effect if you miss a payment. When a borrower misses a month’s payment, he | she then needs to make two payments the next month, in addition to a late payment penalty and the negative effect of having a 30-day delinquency on your credit report. Missing two months can result in having to make three payments and two late penalties, in addition to incurring a 60-day delinquency. This combination can begin a surprisingly quick slide into foreclosure for those who are not very careful.