I keep seeing investors getting ripped off with interest charges that are completely incorrect. Typically when an investor gets to the closing table for the sale of his rehabbed property, he is focused on closing. He wants to make sure his buyer closes. Seldom does he take the time to check for calculating accrued interest his hard money lender is charging him. In some cases he may not care because he couldn’t have done the deal without the lender’s money.
On the flip side, it’s important to better understand what the correct accrued interest should be. You also need to know how it is derived. Payments to lenders are usually made on the first or 15th of each month after the money is borrowed. Because most real estate closings don’t take place on the first or 15th of the month, partial interest is due. This interest is calculated from the date of the closing until the first payment is due. This cost is added to the expenses on the closing statement of the buyer (investor).
Likewise when the investor sells his property it likely won’t close on the first or 15th of the month. In this case the investor will pay accrued interest from the last payment he made, again on a per Diem rate. Some hard money lenders do not require monthly interest payments. This is because the original purchase is due and payable at closing.
When a hard money lender calculates accrued interest the prominent issue becomes “How many days are in the month?” Because the number of days varies between months, some lenders incorrectly assume each month has 30 days. This could be favorable to the lender or not. When you do the calculation yourself you’ll see it’s very simple using the calculator here. But if you start calculating the number of specific days in each month over 6 to 10 months for example, it can get confusing especially when Leap Years roll around.
How much can one day’s accrued interest be?
|Daily Accrued Interest (per Diem) for 365 Day Year|
|$50,000||$ 13.70||$ 16.44||$ 19.18||$ 21.92|
|$100,000||$ 27.40||$ 32.88||$ 38.36||$ 43.84|
|$250,000||$ 68.49||$ 82.19||$ 95.89||$ 109.59|
|$1,000,000||$ 273.97||$ 328.77||$ 383.56||$ 438.36|
But what if your lender uses a 360 day year instead of the a 365 year?
|Daily Accrued Interest (per Diem) for 360 Day Year|
|$50,000||$ 13.89||$ 16.67||$ 19.44||$ 22.22|
|$100,000||$ 27.78||$ 33.33||$ 38.89||$ 44.44|
|$250,000||$ 69.44||$ 83.33||$ 97.22||$ 111.11|
|$1,000,000||$ 277.78||$ 333.33||$ 388.89||$ 444.44|
At first glance you may be thinking that the difference is a few dollars a day and not much to worry about. However, the more important issue is “Are the number of days of accrued interest correct?” This is where you’ll need to take each month and multiply it times the number of days in each month. Make sure to include or exclude Leap Year to get the correct per Diem and what should be the correct number of days. This can be a daunting task even for an experienced investor.
There is a simple solution. It doesn’t cost anything to use. You can calculate your loan’s accrued interest in seconds. Then confront your hard money lender tactfully by saying, “Just checking because I noticed the number of days of accrued interest is incorrect, I borrowed it from ____ to ___ and that’s 176 days. Your calculation shows 182 days which seems to be about $240 too much.” Say nothing after that. The first one to speak loses. At this moment you’ll find out if your hard money lender is trustworthy or not by their response.
Because of this common problem I programmed a simple but accurate Loan Payoff Calculator that can be used by anyone in seconds. You can always find it here. Check out your accrued interest ahead of time. Do this even when you are contemplating getting a hard money loan so you can estimate your expenses and monthly cash flow. Don’t get caught running out of money because of burdensome interest payments. Always check that you are paying the correct amount of accrued interest whether it’s a hard money loan or a conventional lender (bank). Plan ahead!
To your limitless success,