Why are the principal/interest splits of my loan payment incorrect?
The REI Hub loan payment template is designed to automate your loan or mortgage payment breakdown into its component principal paydown, interest expense, and escrow contribution (if applicable) pieces. This helps you keep books faster and more accurately. But what if the principal and interest splits produced by the loan payment template don't match your loan statement?
There are two primary potential causes of incorrect principal/ interest splits produced by the loan payment template:
Current Loan Balance and Date
The most frequent culprit is the 'current loan balance' and its date. This is the number that the loan payment automation begins with. The logic works as follows: the current loan balance times the interest rate, which gives us the interest expense portion. The escrow contribution (if applicable) is a flat amount defined in the payment template. The remainder of the payment goes to the principal (which is also why the loan payment template can accommodate payments with extra principal included).
This means that having an accurate current balance and date of that balance is very important. Even a small discrepancy, like entering the date of the current loan balance for after the payment has hit vs before, will be enough to cause a problem.
You can undo the loan payments it booked incorrectly and then update the loan payment template and save it, which will re-book those loan payments.
If you continue to see incorrect principal/interest splits, the REI Hub support team can help! Please don't hesitate to reach out, ideally with a copy of your most recent loan statement.
Non-standard loans
The other normal (but less common) cause of incorrect principal/ interest splits is if the loan in question is not structured like a standard residential mortgage. By 'standard' we mean a loan that has interest calculated monthly, with one payment per month, and one property on the loan.
Non-standard loans include HELOCs and other lines of credit, interest-only loans, daily compounding loans, and portfolio or multi-property loans. Click here for more information on how to handle lines of credit and interest-only loans.
A daily compounding loan means that the amount of interest paid varies based on which day of the month the payment is made. Our loan payment automation cannot automate this use case, so the principal/interest split would have to be entered manually for each payment. The best practice is to edit the loan (click the pencil icon next to the loan name on the Loans page) and uncheck the box to 'set up loan payment template', and the system will stop trying to automate the payment breakdown for that loan account.
Multi-property loans cannot be automatically handled by the loan payment template. Each loan payment has only one transaction scope, meaning a single loan account cannot be assigned to multiple properties. There are two alternatives for handling multi-property loans in REI Hub's system.
- Hold the loan at the portfolio level: Simply leave the property field blank when setting up the loan account. REI Hub's default proration will split the interest evenly between active properties in your portfolio on the Schedule E, or you can manually prorate the mortgage interest expense at the end of the year to get the desired amount on your tax forms. This is suitable for umbrella loans held by an overall entity.
- Prorate the loan into several loan accounts: Create individual loan accounts that add up to the total loan with the appropriate amount assigned to each property. When a loan payment is made, you would also split it into its component pieces, each triggering the loan payment template of a prorated loan account. You can save this split transaction as a rule the first time you do it for future automation.
The best option for your case likely depends on how important it is to assign a specified loan amount on the property level versus showing one total for the portfolio.
Reach out to the REI Hub support team with any questions!