Interest accrues daily (based upon a 365-day year) up to but not including the date a payment is received that reduces principal. Then, starting on the date the principal was reduced, interest accrues on the new balance. The following example provides an illustration of the calculation the servicer must complete.
- Balance as of March 5 (and assuming interest is fully satisfied to this date): $10,000.00
- Payment of $500.00 received on March 24 (effective date = March 24 with interest accrued through March 23)
- Interest rate = 5.5% Fannie Mae's system will calculate interest on $10,000.00 for 19 days (March 5 to March 24) @ 5.5%. 10,000.00 x 0.055/365 x 19 = 28.63 $28.63 would be applied to interest and $471.37 would go to principal, bringing the new UPB to $9,528.63. Starting on March 24, Fannie Mae's system would calculate interest on the new UPB, $9,528.63.
When a payment is made by the borrower, the servicer must satisfy accrued interest first, then principal with the payment effective, driving the interest calculation.
For more information see Investor Reporting Manual Chapter 2-04, Reporting Specific Payment Transactions to Fannie Mae (02/14/2018)