When Do Mortgage Payments Start?

August 20, 2009 9 Comments »

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A little bit of mortgage Q&A: “When do mortgage payments start?”

New homeowners often wonder when mortgage payments start, as there’s sometimes a considerable gap between closing and the due date of the first monthly payment.

You may have been told by your real estate agent or mortgage broker that payments won’t start for 45 days or longer and express some optimism as a result. But you might be skeptical as well, and for good reason.

Mortgages Are Paid in Arrears

payment date

This loan was closed in early August, but the first payment isn’t due until October.

This phenomenon occurs because mortgages are paid in arrears, not in advance, meaning payment is made at the end of a certain period, such as one month.

Because interest is accrued on a mortgage balance each month, it cannot be paid until after the fact, so your mortgage payment made on the first of the month will cover last month’s interest, along with taxes and insurance, and principal (if applicable).

This differs from monthly rental payments, which are paid in advance for the month they cover; if you rent a property, your payment due on say August 1st covers the month of August.

It makes sense if you think about it. With rent there isn’t a loan involved, and thus no interest. So it doesn’t need to accrue. You just make your payment and get to stay there for the month.

First Payment Determined by Closing Date

It’s gets tricky when you start making mortgage payments, as the start date of your first payment is determined by your closing date.

Example: If you close your mortgage on August 20th, your first mortgage payment isn’t due until October 1st.

However, at closing, you would need to pay the remaining interest for the month of August, or 11 days worth; this is typically known as prepaid interest, and appears as a closing cost.

In this particular example, assuming your mortgage rate was 5.50 percent and the loan balance was $300,000, the daily interest rate ($45.83) x 11 would be $504.17.

Some borrowers think they’re skipping a monthly mortgage payment, but in fact they’ve paid the 10 days of interest in August and the full month of September by the time the October payment is due.

You can, however, avoid costly out-of-pocket upfront expenses by closing at the end of the month.

Doing so cuts down on the amount of prepaid interest that is due initially, but it doesn’t make a difference long-term. And your first mortgage payment will be due sooner.

If you close early in the month, you’ll pay many days of prepaid interest at closing but your first mortgage payment won’t be due for about two months, as our scenario above illustrates.

However, if you close very early in the month, say on the 1st, 2nd, or 3rd, there might be an option to receive a credit from the lender for those few days of prepaid interest and make your first payment the very next month.

This way you can start tackling your mortgage if your goal is to pay it off sooner rather than later.

(photo: thejaymo)

9 Comments

  1. Gary September 11, 2015 at 6:34 am -

    So why would you not give an example if one closes on the 3rd of the month?

  2. Erin October 1, 2015 at 6:28 am -

    If one closes on the 3rd of the month, you would have to pay interest owed for the remaining 27/28 days of that month at closing (and also interest for the 3rd b/c you usually start paying interest on the DAY of closing), but then your NEXT month’s payment would not start until the following month. You are essentially paying the interest that the seller would have paid for the remainder of that month and so you are paying it ahead of time even though it’s interest.

    Example: You close on January 3rd and your mortgage rate was 5.5% with a loan balance of $300,00 then you would owe $45.83 a day x 29 days (including the 3rd) = $1,329. A lot more than $504.17 but you can move in to your new house sooner, so… just depends if it’s a better situation for you or not.

    You would not have to make a mortgage payment for February- your next payment would be on March 1st. You actually ARE paying for February in the grand scheme of things but since mortgage payments are made in arrears (after the fact) then there is that 30 day delay. You can’t really pay interest on something ahead of time.

  3. Colin Robertson October 1, 2015 at 10:33 am -

    Erin,

    Sometimes lenders set it up so you wouldn’t pay the remaining 27/28 days at closing but rather pay your mortgage just one month after closing even if it’s a few days into the month and receive a credit for those few days.

  4. Diane August 7, 2017 at 5:45 pm -

    So, if I close on August 15th, could you tell me when I can expect to pay my first mortgage payment?

  5. Colin Robertson August 8, 2017 at 6:50 am -

    Diane,

    Assuming you pay prepaid interest for all of August at closing, your first mortgage payment would be due in October. That first payment would cover interest from September.

  6. Jade Walker August 24, 2017 at 11:14 am -

    Hi, our completion date is next Friday 1st September. Would our first payment be due on the 1st October? Thanks

  7. Colin Robertson August 24, 2017 at 11:50 am -

    Jade,

    It depends if you’re paying interest for September at closing. If so, your first mortgage payment may not be until November, which would include interest due for the month of October. If you’re not paying September’s interest at closing, the first payment could be due in October. Best to ask the bank directly to be sure.

  8. Kevin November 16, 2017 at 10:39 pm -

    If my payments are due at the beginning of a period (the 1st of each month) then why is it that the P&I is being calculated as payments at the ‘end of the period’?

  9. Colin Robertson November 16, 2017 at 10:47 pm -

    Kevin,

    Mortgage payments are paid in arrears, aka after the month is over. It might be due on the first of the month, but you’re paying P&I for the prior month. This differs from rent, which is paid in advance.

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