Unpaid principal balance, shortened to UPB, is the part of the original loan your payer has not yet repaid. Interest that has not come due is left out of it. A note buyer measures every offer against this figure, so yours needs to be right to the dollar.
What the balance includes
Principal is the amount that was lent. On a seller-financed sale that means the sale price minus the down payment. Each monthly payment pays that month’s interest first, and only what is left over comes off the principal, which is why the balance falls slowly in the early years of a note and faster near the end.
| Item | Part of UPB? |
|---|---|
| Loan amount not yet repaid | Yes. This is the UPB. |
| Interest on future payments | No. It only becomes owed as each month passes. |
| Interest built up since the last payment | No. It is owed, and it is tracked separately. |
| Late fees | No, unless your note says unpaid amounts are added to principal. |
| Taxes and insurance you collect | No. That money passes through you. |
A payoff figure is a different thing again. It starts from the UPB and adds the interest built up since the last payment, plus anything else the note allows.
The balance against the total of your payments
Multiplying the payment by the months left gives the amount you will collect if every payment arrives. It is an easy figure to mistake for what you are owed, and it is always the larger of the two, because it includes interest for years that have not happened yet.
Take a note that pays $1,140 a month at 6% with 168 payments left. Those payments add up to $191,520, while the unpaid principal balance is about $129,400. The $62,120 between the two is interest the payer will owe one month at a time, for as long as the loan keeps running.
Illustrative example. Your own figures depend on your rate, your payment and how many payments have been made.
If the payer paid this note off tomorrow, the check would be roughly the UPB plus a few days of interest, far short of $191,520. A buyer thinks the same way, which is why an offer is set against the balance and never against the payment total.
Balance and price
The balance is what you are owed over time, and the price is what someone will pay today for the right to collect it. A buyer wants a return on their money, called a yield, and gets it by paying less than the balance. That shortfall is the discount, and time and risk are why notes sell for less than the balance. On the note above, a buyer looking for an 8% yield would pay $115,000 in a full sale against the $129,400 balance, again as an illustration only. The balance is one input among several: the rate, the term, the payer’s record and the property all go into what your note is worth.
Why a buyer wants it exact
The payments still to come are what a buyer prices, and the UPB tells them how many of those payments are really left. It is also the starting point for loan-to-value, which is the balance divided by what the property is worth. A balance that is off throws out both.
Expect the purchase agreement to state the UPB as of a set date and to ask you to confirm it. If the buyer’s review of your payment record produces a different balance, the price is worked out again, so a quote built on a guessed balance is one that will probably move. When you ask for a price on your note, give the balance with the date it was taken, and say so if it is an estimate.
Working out your own balance
Where you look depends on how the payments have been collected.
- If a servicing company collects them, its latest statement shows the current principal balance, and that is the figure to use.
- If you collect them yourself and every payment arrived on time and in full, read the balance from an amortization schedule, the table that splits each payment into interest and principal.
- If payments came late, short or with extra amounts, the schedule printed at closing no longer matches the loan. Rebuild the balance from the dates and amounts actually paid.
A payer who sent an extra $200 now and then owes less than the printed schedule says, and one who skipped two months owes more. Write down the balance you arrive at and the date it applies to, alongside the payment, the rate and the number of payments left. Any quote on the note can then be checked against a balance you trust, and a buyer who arrives at a different one can be asked to show which payments account for the difference.
Related questions
Is the unpaid principal balance the same as the payoff amount?
They are close but different. A payoff adds interest that has built up since the last payment and any other amounts the note allows, such as unpaid late fees. The principal balance is the largest part of a payoff.
What if my records and my payer's records show different balances?
This can happen when payments have been collected by hand. The balance has to be rebuilt from the actual dates and amounts of every payment. A buyer will do this during their review, so it is better to settle the figure before you ask for a price.
Does the balance go down by the full payment each month?
No. Each payment covers that month's interest first, and only the remainder reduces the principal. Early in a note the interest share is at its largest, so the balance falls slowly at first and faster later.