Interest is the cost of borrowing money. With a mortgage, the lender charges interest as a percentage of the outstanding loan balance in exchange for lending you the funds to purchase or refinance a home.
Each monthly mortgage payment includes both principal (the amount that reduces your loan balance) and interest. Early in the loan, a larger portion of each payment goes toward interest. As your loan balance decreases over time, more of each payment is applied to principal.
Mortgage Interest Is Paid in Arrears
Mortgage interest is charged in arrears, meaning the interest shown on your monthly statement reflects interest that accrued during the previous month. This is different from rent, which is typically paid in advance for the month ahead.
Interest Paid at Closing (Prepaid Interest)
Because interest is charged in arrears, borrowers prepay interest at closing to cover the days between the closing date and the end of that month. Closing later in the month generally means less prepaid interest is due because fewer days remain before month-end.
This doesn’t reduce the total interest paid over the life of the loan. You only pay interest from the day you become the owner of the home. The difference is simply how much cash is needed at closing and when your first mortgage payment is due. There is no “best” day of the month to close from an interest standpoint.
When Is the First Mortgage Payment Due?
Your exact first payment date will be listed in your First Payment Letter included with your closing documents, so always follow the date provided by your lender.
In most cases, your first mortgage payment is due on the first day of the month after the month in which you close.
Example: If you close on April 15, you’ll prepay interest for April 15 through April 30 at closing. Your first full mortgage payment will then be due on June 1.
Tax Reporting (IRS Form 1098)
Each year, your lender sends you IRS Form 1098, which reports the mortgage interest you paid during the year. If you itemize deductions, you may be able to deduct some or all of your mortgage interest, subject to IRS rules.