In the practice of real estate finance, lenders have a few choices on how to calculate the interest charged to their borrowers. In this article, we will explore the cost differences and the effective rates of three common types of interest calculations:  360 / 360, 365 / 360 (Bank Method), and the 365 / 365 (Stated Rate Method). The first number represents the number of days in the compounding period for which interest is to be charged. For 360, interest will only be charged on 360 days of the year. If the loan calls for a monthly compounding period, interest will be charged on a 30-day month regardless of the number of actual days in the month. For 365, the loan calls for interest to be charged on the actual number of days in the compounding period. The second number represents the number of days in the year to divide the Annual Percentage Rate by. For 360, the stated interest rate is divided by 360. For 365, the stated interest rate is divided by 365.

 To illustrate the differences, let’s use an example lending commitment. The table below sets out our assumptions:

When we amortize each interest type to maturity and sum up the total interest that would have been paid over the life of the loan, we find that the lifetime interest paid for each type in the table below:

The most advantage interest calculation type to the borrower is the 360 / 360 followed closely by the 365 / 365. The 365 / 360, when amortized over the 360 term periods, will cost the borrower an extra $37,460 (3.746% more) when compared to the 360 / 360 interest type. Next let’s determine at what effective rate will cause each alternative to have the exact same lifetime interest cost. The results are shown in the table below:

If a borrower is evaluating a financing proposal from a lender which charges interest the actual number of days dividing the stated interest rate by a 360 day year (365 / 360), the stated interest rate must be equal to or lower than 4.92853% to make it comparable or advantageous to the borrower when compared to the 360 / 360 interest calculation type. The 365 / 365 type is virtually identical to the 360 / 360 interest calculation type.

In this example, we used a 30-year amortization term period. If the loan calls for a shorter term, say 10 years, the effective interest rates remain the same and the interest cost of the 365 / 360 loan will again cost the borrower an extra 3.746%.

This analysis was prepared in a matter of minutes using the Comparative Finance module of Portfolio Debt Manager (PDM). To better understand your loans and their effect on the assets by which they are secured, loan management software like PDM can be invaluable. You can project the balances of your loans forward in time even if they have graduated payment types. Additionally, you can view the debt of your real estate assets, consolidate your asset debt to the portfolio level, and track it over time. Every piece of information on your loans can be accessed with the click of a button.   To learn more about interest calculation methods and Portfolio Debt Manager, visit www.portfoliodm.com

For additional information about this and other topics contact Ledgerwood Associates.

To register for a free webinar on PDM click here.

Denver, CO (May 1, 2012) – Sage Software Construction and Real Estate announced today the assignment of its Colorado customer base to Sage Authorized Business Partner, Ledgerwood Associates, Inc. (LAI). Under the new arrangement, local sales, consulting, training and support services will be provided by Ledgerwood’s experienced staff to Sage CRE customers located in the Rocky Mountain Region. Those affected by the announcement include users of Sage Timberline Office, Sage Timberline Enterprise, Sage Estimating, and Sage Master Builder software solutions.

“Colorado construction companies will benefit from having a local Sage Business Partner to deal with,” said, Ed Ledgerwood, LAI’s President. “Sage Certified training, consulting and support services will be provided to customers on-site by local resources.”

With offices in Denver, Colorado, Salt Lake City, Utah, and Scottsdale, Arizona, Ledgerwood Associates is one of the largest Value Added Resellers of Sage Construction and Real Estate software products and services, providing a comprehensive suite of software solutions to more than 1,200 construction and real estate industry customers throughout the Southwestern and Rocky Mountain regions.

LAI provides solutions for commercial and industrial construction companies; service and specialty contractors; mining, oil and gas; highway construction; residential construction; property management and developers.

LAI’s suite of integrated estimating, job cost accounting, project cost management, service management and property management products include business planning, reporting and analytical solutions.  LAI provides software implementation, training and support services, specialized material and resource database development, computer hardware and network integration or hosting services; and outsourcing trade-specific applications and tools.

For additional information regarding this announcement contact

Robin Harris
Director of New Business Development
Ledgerwood Associates
(303) 249-9091 Direct
Corporate office 877-918-8301
Robin@LedgerwoodAssociatesUSA.com