Interest Adjustment Date

Mortgage
payments are made in arrears. In other
words, when each payment period is over, lenders look back and calculate their
interest based on the money you owed during that period.

The
interest adjustment date is the date from which your lender first starts
calculating the normal ongoing interest that you’ll pay.

Interest
adjustment dates tend to commonly fall on
the 1st day of the month after mortgage funds are advanced to the borrower.

For example, suppose you close your mortgage on April 25 and have signed up for
monthly payments. Here is how the dates might
stack up:
 

April 25: Mortgage
starts (a.k.a. the closing date)

May 1: Interest
adjustment date

June 1: First payment
date

 
Your first
payment on June 1 will therefore be based on the interest that accrued since
your interest adjustment date (i.e. from
May 1 to May 31). 

If you plan
to make bi-weekly payments, then instead of one month after, your first payment
would be two weeks after the interest adjustment date.

Before the
interest adjustment date, however, you will have held the lender’s money for a
period of time. In the example above, this period would have been April 25 to April 30.

Lenders like to get paid
for this time. As a result, lenders
charge a one-time amount of pro-rated interest to cover it. This interest-only payment is called an “interest adjustment.”  It compensates the lender for the time you
held their money before your first
official payment period began.

Lawyers and
notaries routinely collect interest adjustments at closing. Confirm this when you discuss your closing
costs with them.

Keep in mind, it is possible to avoid interest adjustments
altogether. To do so, you need
to schedule your
first mortgage payment exactly one payment period (e.g. one month) after your closing date.

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