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