Mortgage Interest is paid “in arrears”
ARDELL on 02 19, 2009
For Home Buyers: This means the first payment is usually a month later than you expect it to be.
For Home Sellers: This means your mortgage “payoff” is going to be higher than you expect it to be.
This is one of the small issues that often surprises people when they are buyng and selling homes. Often sellers will think the payoff is wrong, because it is higher than the principal balance on their most recent mortgage payment statement. Often buyers will be worried about paying rent and a mortgage payment for the month after their close date, and are surprised that the first mortgage payment is a month later.
Basically all “mortgage interest is paid in arrears” means is that your March 1 payment, pays February’s interest on your loan. Your April 1 payment pays your March interest.
For a buyer, if your closing is February 26th, your first mortgage payment is due on April 1st, and that will include all of the interest for the month of March. (February’s interest per day from closing to month end is paid AT closing)
For a seller, if your closing is Feburary 26th and your principal balance is $362,000 and your monthly payment is $2,800 including taxes and insurance, your payoff may be more like $363,500.
I was preparing some numbers for a client with a March close, and decided to post this for anyone having similar questions.
About the Author: Ardell DellaLoggia
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One of the other reasons payoffs can be larger than the payoff statement is due to escrow collecting additional days of interest. This is due to the potential for unknowns to happen such as overnight deliveries that don’t arrive on time, similar to what occured this past December due to poor weather which caused delivery delays or outright loss of documents (payoffs or loan docs).
This is also why home owners “skip” a mortgage payment (or think they are) when they refinance.
I apologize for the off topic post, but I just saw a SFH in Bellevue on the market for $300k. I remember the predictions that those days were long gone.
I am sure it is nearly uninhabitable…
Or a short sale…
By the way, that is not my twitter profile linked above.
Alan,
I appreciate your not posting the address according to our mls restrictions. I’ll go check it right now. P.S. You have a GOOD memory
Alan,
It is a short sale and a little beyond a short sale, lots of ifs ands or buts on that one. Also work started and not completed. I’ll be studying it further and already emailed it to one of my clients. Thanks for the heads up!
Alan,
I don’t like the main floor foot print being under 1,000sf given it has no second floor. Appraisers aren’t giving much value to basement square footage these days.
I’ll never get used to basement square footage being added to above ground square footage in the mls around here. It should be a 990 sf “with basement”, vs. a 1,900sf house.
Alan,
Didn’t see that house in Bellevue, but did visit a $295,000 bank owned property in Bothell yesterday evening. It’s a toss up as to restoring damage or bulldozing it, so priced between lot value and max home value of $415kish.
More of an investor property than an “end user” bargain. Perhaps we can agree on the house needing to be habitable in as is condition without needing thousands in repairs just to move in to it.