In most new real estate mortgage loans, there is a HUD-1 item for the buyer to prepay the lender for the interest on the loan from the closing date to the end of the month of closing. Interest is paid in arrears, and the first payment usually falls on the first day of the month following the month of closing:
- A closing on June 15 would require interest prepaid for the period from June 16 to July 1.
- The first payment would be due on August 1, with interest in arrears for the month of July.
As an example, we can use a mortgage amount of $272,000 with an interest rate of 7%, and the dates above.
- $272,000 X .07 = $19,040 in annual interest
- $19,040 / 365 calendar days = $52.16/day in interest
- $52.16 x 15 days in June = $782.40 in interest to prepay
- The August 1 payment would include interest in arrears for July
Mortgages and Lending
Mortgage payment and interest calculators are all over the internet now, and many smartphone apps as well. Some information points with links for more research are below:
- How fixed rate loans work. Each month's payment is equal to the interest rate times the principal, plus a small percentage of the principle itself. Since a bit of the principal is paid off each month, that makes the interest payment on the remaining principal slightly less. As a result, more of the monthly payment goes toward principal each month. Therefore, at the beginning of the loan, most of the payment goes toward interest while most of it goes toward the principle at the end.
- 15-year vs. 30-year mortgages. While several types of mortgages are available for home buyers, most Americans think of financing with the archetypal 30-year fixed mortgage. Other options, such as a 15-year fixed mortgage, are often viewed as more expensive, but most home buyers don't realize that, in the long run, a 15-year fixed mortgage may be more likely to meet their financial goals.
- Adjustable rate mortgages. Adjustable-rate mortgages (ARMs) are home loans with a rate that varies. As interest rates rise and fall in general, rates on adjustable-rate mortgages follow. These can be useful loans for getting into a home, but they are also risky. This page covers the basics.
- Blanket real estate mortgages. Buyers, particularly in commercial real estate markets, can get better terms with blanket mortgages. Lenders can make money with them If the numbers work and they get enough security.
If income from your retirement funds, savings, and Social Security benefits doesn't cover your expenses, or you'd like the financial freedom to enjoy your retirement years a bit more, you can use the equity in your home to apply for a reverse mortgage.