There are many components to manage as you progress through the home buying journey. In fact, your first mortgage payment is dependent on the timing of other steps in the mortgage process. Your closing date will determine when your first payment is due. It will also determine how much prepaid interest you will be responsible for at closing. We will explain how all of these pieces work together and ensure you have a thorough understanding to empower you to make the best decisions as you buy your home.
When is my First Mortgage Payment Due?
Your monthly mortgage payment is usually due on the first day of the month. But your first mortgage payment is due at the beginning of the first full month after your closing. For example, if you close on June 2, the first full month after that would be July, and your first payment would be expected on August 1.
That might seem strange, but here’s why: Your interest is paid in arrears, while your loan principal is paid in advance. We explain how both of those factors contribute to this formula.
What Makes Up Your Mortgage Payment?
Your mortgage payment consists of two main components: the interest and the principal. The principal is paid in advance (for the upcoming month), while the interest is paid in arrears (for the previous month).
In addition to these basic tenets, other typical components of a mortgage payment include:
- Homeowners Association (HOA) Fees
You won’t have to guess about the specifics of your payment because, during the mortgage process, your lender will provide you with a closing disclosure. The closing disclosure is a final list of actual settlement costs and will include your loan’s detailed parameters.
Mortgage Interest is Paid in Arrears
Mortgage interest is paid after it is accrued, meaning when you make your monthly payment you’re actually paying for the interest that accrued last month. You will prepay the interest for the time between your closing date and the first full month of your loan as part of your closing costs.
Mortgage Principals Are Paid in Advance
As you make your payments each month, you’re paying down the principal balance. Therefore, in each subsequent month, you’re charged interest on those lesser principal amounts. That’s why the interest is calculated afterward, ensuring you’re paying interest on the lower amount.
Prepaid Interest Costs at Closing
On your closing day, you will owe prepaid interest for the amount of time before the first full month of your new mortgage.
Going back to our earlier example to break that down: If you close on June 2, you will prepay for your mortgage interest from June 2 to 30. Then, on your first mortgage payment on August 1, you would pay the interest that accrued over that first full month of the mortgage in July.
These interest fees, along with all the other details of your loan transaction, are conveniently packaged in the closing disclosure your lender is required to provide. Prepaid interest fees are listed in the Other Costs section. Your loan officer will be your go-to resource for any concerns you might have about understanding your mortgage.
This toolkit provides an in-depth guide to understanding your home loan and more detail on the closing disclosure.
What Closing Date is Best?
After digesting all of this information about calculating your first mortgage payment date, how interest and principal payments work, and how partial month interest fees are paid at closing, you’re probably left wondering if it’s better to close earlier or later in the month.
It all comes down to what’s best for your financial situation. A closing date later in the month will reduce your prepaid interest costs, but it also means your first mortgage payment will be due in just over a month. Conversely, a date earlier in the month will give you more time before your first payment but will result in a higher prepaid interest amount, raising your closing costs.
You should consider your cash-on-hand against your upcoming cash flow. This can help you determine which priority is more important: lowering your closing costs or having more time before your first payment, allowing you to bring in more income before your monthly payments begin.
Now you’ve got the basic understanding of how to calculate your first mortgage payment due date.
Our friendly and expert loan officers are always available to work with you to understand your specific situation and guide you through your home buying journey.
Get started with one of our loan officers today.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 1/8/2021.