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What is a Mortgage Interest Adjustment?

This article will look at the mortgage interest adjustment, one of the most commonly overlooked closing costs.

Mortgage Interest Rate

What is the Mortgage Interest Adjustment?

Before we talk about the mortgage interest adjustment, it helps to discuss the closing date first. Pretty much everyone is familiar with the closing date.

When you’re the home buyer, the closing date is when ownership and title of the property you’re buying are transferred to you. Your lawyer also exchanges the down payment funds with the seller’s lawyer.

Your first mortgage payment almost always takes place on another day besides your closing date, and that’s where the mortgage interest adjustment comes into play.

The mortgage interest adjustment is how much interest adds up between the closing date of your home and the day your mortgage lender withdraws the first mortgage payment from your bank account.

Interest starts accruing as of your home’s closing date. You should expect to pay some mortgage interest adjustment since your first mortgage payment date rarely happens on your closing date. By no means is the mortgage interest adjustment the most expensive closing cost, but it’s still important to budget for it, so you’re not surprised by it.

How Much Should I Expect to Pay for the Mortgage Interest Adjustment?

Understanding how much the mortgage interest adjustment might add up helps to run through an example together.

Let’s say you have a $500,000 mortgage and your closing date is January 31st. However, you choose monthly payments, so your first mortgage payment isn’t until February 28th. That’s 28 days after your closing date. Again, even though you don’t need to make your first mortgage payment until February 28th, mortgage interest starts accumulating as of the closing date, January 31st.

Based on a mortgage rate of 2.99%, your annual mortgage interest (ignoring compounding) would be $14,950 ($500,000 X 2.99%) and your daily interest would be $40.96 ($14,950 / 365 days). Therefore, your interest adjustment based on this would be $1,146.85, payable to your lender.

What is the Interest Adjustment Date?

The interest adjustment date is pretty straightforward. It’s the date your mortgage interest adjustment amount is payable to your mortgage lender. However, unlike other closing costs, you may not need to pay this upfront or closing date. Your lender will usually be okay with receiving this payment the day before the day your first mortgage payment is scheduled to come out of your bank account.

You also have the option of paying it on your closing date or adding it to your first mortgage payment to be withdrawn then.

The Bottom Line

Do you need help budgeting for your mortgage interest adjustment amount? Our mortgage experts are here to help. Reach out to us today for a helping hand.

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