You pay an interest adjustment amount on your mortgage when the closing date doesn’t fall on the first day of the month. If this is the case, home buyers have to factor into their closing costs an interest adjustment payment.
On your closing date, your lender advances your mortgage, but regular interest doesn’t start accruing until the first of the next month. The interest adjustment payment covers the interest that accumulates between the time it takes for your regular scheduled payments to start.
The interest adjustment amount is a one-time payment. Your lender will review the amount with you when you sign your closing documents. Lenders will automatically withdraw this payment from your mortgage payment account.
For example, you take possession of a new home on September 20th. Your regular monthly payment will start on November 1st. The interest accrued between October 1st – October 31st is included in the November 1st payment. The interest owed for the eleven days in September doesn’t get accounted for in your first mortgage payment and is owed as an interest adjustment payment.
Here’s how to calculate an interest adjustment payment:
1. Calculate the total mortgage interest owed for the year.
$200,000 x 3.14% = $6,280 (mortgage amount x mortgage rate)
2. Calculate the mortgage interest rate per day.
$6,280 ÷ 365 days/year = $17.20 (mortgage interest owed for the year ÷ 365 days per year)
3. Calculate the mortgage interest rate for the number of days in between your closing date and your interest adjustment date.
$17.20 x 11 days = $189.26 (interest rate per day x number of days remaining in the month)
Even though the interest adjustment amount is small and only happens once at the beginning of your mortgage, it is still a closing cost that you need to consider when buying a house. Make sure to include this into your budget.