Mortgage with gap in payments

Your calculation, which continues to compound interest on the principal amount remaining at the time of the latest payment made, is intuitively correct. If this were a standard mortgage contract with a bank, it would certainly work that way (that is, if they allowed you to go on a 20-year payment hiatus).

The problem is, you are dealing with a legal matter, and what truly applies in this case will depend on the legal agreement you made with the mortgagee. Does your contract actually consider this possibility? Further, is your contract one which would hold up in court as being legally binding?

You're dealing with a $230k discrepancy between what you believe is correct and what the mortgagee believes is correct. Time for paid legal advice, not a free forum post.

She is certainly wrong (you don't get to just not pay for 20 years and pick up where you left off) and you might be right depending on what the mortgage says about "accrued unpaid interest" - if it compounds (meaning any unpaid interest is included in the calculation of the next month's interest) then your formula would be right.

If it does not get included in the interest calculation and just accrues as simple interest (for example, my mortgage says that interest will be charged on the "unpaid principal balance", which would probably be interpreted to NOT include unpaid interest), then you need to split the remaining "balance" into two parts: the actual principal owed and the accrued interest.

The accrued interest would be the interest rate times the principal balance after the last payment times the number of periods, or $115,841 * (.06/12) * 264 = 152,910. So the total amount "owed" would be $268,751, but only the 115,841 would continue to accrue interest.

All that said, this mortgage is in default, and if the mortgage doesn't specify what to do in case of default, then it comes down to whatever the two of you can agree on. You hold a lien to the house, but she holds the checkbook, so you need to wither work out a settlement or go to court, present your arguments, and let a judge decide what would be "fair".

How default is handled is highly dependent on what agreement, and what documentation of that agreement, exist. But it might be moot: if no payment, and no attempt at collection, has been made in 264 months, any action may be barred by statute of limitations. I have moral qualms about saying this, but your first priority probably should be restarting the SOL clock, by getting them to do things such as acknowledge the debt, promise to repay the debt, make initial payments, etc.

Mathematically, the correct outstanding balance on the loan, under the assumption of a nominal annual interest rate of i^(12) = 0.06 convertible monthly, with compounding continuing on the unpaid balance, is $432216.91. This is consistent with your stated value in the amortization table, which should be exactly $115840.77 at 45 months, and is because the effective monthly interest rate is i^(12)/12 = 0.005. The level payment per month is $931.36, as given by $130000 x 0.005 / (1 - (1.005)^-240).

Rather than the formula you used, we simply write $115840.77 x (1 + 0.005)^264 to get the accrued value of the outstanding balance, because the compounding schedule is monthly.

Had a bank or other mortgage lender allowed such a long period of nonpayment (longer than the original term of the loan!), which is absurd since they would have long since foreclosed on the home, they would have undoubtedly tacked on additional penalties for nonpayment. They would not have allowed the outstanding balance to remain the nominal value for 22 years. This would effectively constitute an interest-free loan with no penalties and would result in a tremendous loss of the time value of money. As such, there is no conceivable justification for the borrower to claim that the outstanding balance remains at $115841. Even simply adjusting for inflation for the past 22 years, with no interest applied, that amount would be roughly equivalent to $184298 today.

I would immediately begin foreclosure proceedings on the property and resell it because the value of that property alone probably exceeds what the borrower will repay even under your proposal. If she is wishing to hold you to the terms of the mortgage, and foreclosure is your only recourse, then she is more than welcome to experience the consequences of being in default for 22 years.