The repayment structure on a mortgage loan differs from the way you might be accustomed to paying for housing. On a rental, you pay the coming month's rent at the beginning of the month -- prepaying for the time you'll live there. A mortgage payment works differently because you pay the debt off in arrears. The loan is established at closing. At that point, the repayment clock, which is typically based on a 15- or 30-year period, begins.
Mortgage Closing Protocol
Settlement, also known as "closing," on a home involves signing various legal and financial documents that place property ownership and the home financing responsibility in your name. You close on a home loan by signing the lender's documents, including a note and deed of trust or mortgage document, and by paying the required down payment and closing fees. You owe mortgage interest from the day you sign through the end of the month. If ownership officially transfers on a day other than the signing day, the lender and escrow holder normally adjust figures so you don't pay for the lag time between signing and the title deed's recording.
Arrears, Grace Periods and Penalties
Payment for a home loan debt, or mortgage arrears, is due at least one month after closing. The lender collects prepaid mortgage interest for the closing month, which results in mortgage interest for the first full month you own the home due the subsequent month. Most mortgage payments are usually due on the first of the month, but lenders give about a 10- to 14-day grace period before charging penalties for late payment. Your closing documents contain the specifics regarding payment due date, the grace period, late fees, and the amounts owed at closing.
Calculating Mortgage Interest
To estimate the amount of prepaid mortgage interest you owe at closing, start withe the date you sign final loan documents. You must multiply the loan's interest-only payment by number of days remaining in the closing month following this date. For example, if you have a January closing -- a 31-day period -- and close on the 15th, you owe 16 days of interest. To determine the interest-only amount per day, multiply your loan amount by your interest rate expressed as a decimal, then divide by 12. For example, a $150,000 loan at 6 percent, or .06, equals $9,000, which when divided by 12, results in a $750 monthly interest-only payment. You then divide $750 by 31 days to get the daily interest owed -- about $24.19. Multiply this figure by 16 for the total interest owed at closing -- about $387.04.
First Payment Month
Your first payment covered the closing month and you "skip" a month before your first payment. Although you ultimately pay for the first month you own the home, you bypass remitting a payment that first month until the next month. For example, a January closing means you skip February and owe the first payment on March 1. In this case, sending mail-in payments in late February helps ensure that your payment arrives by the first or soon thereafter, but the lender's grace period is usually enough time for your payment to arrive before the late-payment deadline if sent on or soon after the first of the month.
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