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Why is it when we calculate mortgage payments on a calculator or spreadsheet, they never match our bank calculations?
January 31, 2015
I am asked this question a lot ... OK, that's an exaggeration. I'm asked this once every two years or so, but since it came up recently, here are a couple of possible reasons.
First is simply rounding differences between your calculations and the banks computers. But sometimes these can be larger than you would expect. I have a person experience from many moons ago where this was a huge issue. I had the noble task of getting mortgage calculations programmed on a new computer system approved by the OCC. I struggled to get our APR calculation to match the OCC figure, and, given that the APR is an interactive calculation that considers amounts over a period of 30 years, the difference was more than just one simple rounding error. What I found after long days and sleepless nights, was that the OCC rounds every single step in every calculation to 2 digits before going forward. And if you are familiar with the APR calculation, the system might need to go through 100 individual calculations before coming up with the "right" answer. So the more calculations it did, the more exaggerated our rounding error became.
The second reason is because some banks use a 365 day year and some use a 360 day year for calculations. Both ways are legal but could result in slightly different interest or payments.