A common question people ask me when I’m working on a loan is the date of their first payment. The way mortgage payments work, you make your payment at the end of the month. This is different than rent, where you pay at the beginning of the month. Meaning, you pre-pay for the month to come when you pay rent, but when you make your mortgage payment you’re paying for the month that just passed. The difference is that you’re paying interest on money you’ve borrowed when you make your mortgage payment. Naturally you don’t owe the payment until the money has been used and interest is due. This is oftentimes a very confusing concept for borrowers but is important to understand as it affects the date of your first mortgage payment.
You have pre-paid interest as part of your closing costs at the close of escrow. This is essentially your daily interest rated times the number of days remaining in the month. So, if you close in the 16th of the month (in a month with 30 days), you would have 15 days of interest due at the end of that month. Instead of asking you to make a payment that month, lenders will just ask you to pay upfront at close. This results in your first mortgage payment being due the 1st of the following month. So, if you closed on September 16th, your first payment would be due November 1st.
However, there is a feature called interest credit – where if you close within the first seven days (varies from lender to lender), instead of charging pre-paid interest the lender will give you an interest credit back for the number of days in the month. So, if you closed on the 4th – you would get four days of interest credit back at close. This of course results in you having to make your first mortgage payment at the end of the month. So, if you closed on September 4th and you received four days interest credit, your first payment would be due October 1st. A whole month earlier than in the prior example.
Be aware that you do have a choice on whether or not to accept an interest credit – but you need to mention this to the bank. Either way you’re paying – whether it is at close or in the form of a mortgage payment, but you need to be prepared. Purchasing a home entails lots of charges, so its easy to run into a cash flow problem if you are closing at the beginning of the month and your first payment is in a few weeks. The first payment is not one you want to miss – not that you want to miss any payment at all.