Mortgage Interest is paid “in arrears”

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.