The following interest methods are supported in Servicing Director.

Arrears—Standard

Interest that is applied in arrears pays the interest for the previous month. For example, a payment due on 6/1/99 pays the interest up to 6/1/99 when the payment is applied. The interest is calculated by multiplying the principal balance by the interest rate, and then dividing by 12. Arrears is the standard interest method for the secondary market.

Arrears—Actual/360

If the interest method is arrears and the payment frequency is monthly, you can select Act/360 in the Interest Days field to have the interest due each month calculated on the actual number of days between due dates, based on a 360 day year. This is for amortizing loans, so the principal and interest spread is not affected by the date that the payment is made. The calculation is principal balance multiplied by the interest rate, divided by 360 multiplied by the number of days.

Advance

Interest that is applied in advance pays the interest for the current month. For example, a payment due on 6/1/99 pays the interest up to 7/1/99 when the payment is applied. The interest is calculated by multiplying the principal balance by the interest rate, and then dividing by 12.

Interest Only

The interest for an interest-only loan is applied in arrears; however, on interest-only loans, the entire P&I payment should be applied toward interest. If the amount of the P&I payment is greater than the interest due, the difference goes to principal. This results in all future P&I payments amortizing the loan, unless the P&I payment amount is recalculated. Loans that are interest-only for the entire term should be marked as balloons. Interest-first loans are interest-only for a specified term, then change to arrears to amortize over the remaining term. Many commercial loans use this interest method.

Daily/360

For a loan with an interest method of daily/360, interest accrues on a daily basis. These loans have an accrued interest record with an accrued interest balance that increases every day when the Daily Simple Interest Accrual event is run. The interest is calculated by multiplying the principal balance by the interest rate, and then dividing by 360. The date that the payment is posted is extremely important for these types of loans because it affects how much of the payment is applied to principal and how much is applied to interest. When payments are applied, the P&I payment is applied to the accrued interest balance first. Then, the remaining amount is applied to principal.

Daily/Actual

For a loan with an interest method of daily/actual, interest accrues on a daily basis. These loans have an accrued interest record with an accrued interest balance that increases every day when the Daily Simple Interest Accrual event is run. The interest is calculated by multiplying the principal balance by the interest rate, and then dividing by 365 or 366—depending on the year. The date that the payment is posted is extremely important for these types of loans because it affects how much of the payment is applied to principal and how much is applied to interest. When payments are applied, the P&I payment is applied to the accrued interest balance first. Then, the remaining amount is applied to principal.

Note: All HELOC loans in their draw period must have an interest method of Daily/Actual or Daily/360 for payments to be calculated.

Environment:

ArticleNumber:

000051237