Mortgage Payments and Interest

Mortgage Payments and Interest

When Will My Payment Be Due and What is Pre-Paid Interest?

Nearly all first mortgage loans have a due date of the 1st of the month.  Typically, a late charge of 4 or 5% is charged on payments made on the 16th of the month or later.  If the payment is made after the next due date on the 1st, the payment is considered 30-days late.  This type of late payment is reported to the credit agencies and can severely lower your credit rating.  A late payment made after the 16th but before the end of the month it is due is not reported to the credit agencies.

When a mortgage payment is made in the month it is due, the interest portion of that payment pays for the interest due for the prior month.  For example, a payment made on July 1st pays for the interest for June.  This is known as arrears.  Interest on mortgage loans is paid in arrears.

When you close on a new mortgage loan, you will be required to pay interest at closing from the date you close through the end of that month.  This is known as prepaid interest.  Because of this, your first mortgage payment due will be the second month after you close.  Let’s look at an example of closing on May 22nd.  At closing, interest will be due for May 22nd through May 31st.  This is a total of 10 days.  You will see a charge at closing on your Closing Disclosure (CD) for prepaid interest of 10 days.  When closing on May 22nd, your first mortgage payment will not be due until July 1st, and that payment will pay for the interest for June.  Subsequent payments will be due on the 1st of each month.

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