Title company doesn't know how to amortize a loan?

Question

More likely I don't get it/am not used to this. Can anyone explain/formulate what I'm told is a "Daily amortized, 5.5%, fixed interest rate loan"?

I've been buying and selling properties for over 25 years. This is the strangest thing I've ever experienced and the escrow company handling this can't seem to explain it in a way that isn't just word-soup. This is a contract For deed, seller financed property and the title company set up the closing and is handling the long-term escrow/amortization of the loan.

The $9 a month is the escrow fee. When I asked them why the interest doesn't tie-out/compute they said it's because it's calculated daily and the days per month change. When I attempt to figure this out / write a formula it's still off by a lot sometimes. At which point they stated, it's probably because i'm using 365 days a year and this assumes uses 360. Furthermore, when I asked where I signed off on a "daily interest amortized loan - whatever that is", the point in my documents where it states this - doesn't actually state anything other than: "5.5% fixed interest rate." I guess I just made an assumption that was amortized "normally". There was an example amortization schedule in our closing documents. I guess I didn't look closely at it, but we did NOT sign or initial it either. It was just a piece of paper we were handed. I didn't notice this until looking at my year-end statement.

Answer 1

I can tie out the interest if I use a "Actual/365" day count convention. What that means is that the interest for a month (or any period really) is calculated by taking the number of actual days in the period (e.g. 28 days between 2/1/2021 and 1/4/2021), dividing it by 365, multiplying by the interest rate (5.5%), and multiplying by the outstanding principal (448,884.37).

28/365 * 5.5% * 448,884.37 = $1,893.92

Another way that some people do it is to calculate the "daily interest" for a period, by taking the interest rate times the principal and dividing by 365:

daily interest = 448,884.37 * 5.5%/365 = $67.64

then multiplying that number times the number of days in the period:

$67.64 * 28 = $1,893.92 

but mathematically it's the same so long as you use an un-rounded daily interest amount.

Note that the day-count conventions generally doesn't make a huge difference - if you used a "30/360" day-count (in which you just divide the annual rate by 12), your principal balance on 12/1 would be less than $1 different. It just changes how the interest is spread over the months in a year. With Actual/365 you pay more interest in March than in February, where with 30/360 the interest is spread more evenly, but over the year the differences more or less cancel out. Also note that the payment date on some months is adjusted for weekends and holidays (e.g. 1/4 instead of 1/1, which changes the allocation slightly, but doesn't change the overall interest for the year that much.