Confused about Mortgage Interest? Here’s How It Works

Many first-time home buyers are confused about the way mortgage interest works; in fact, it’s fairly easy to understand once you think about it.

As you know, any type of loan – whether it’s a mortgage or a car loan – requires you to pay interest to your lender for the use of this money while you’re paying it back.

However, the way you pay back a mortgage may be a little different from paying back other types of loans: you make your mortgage in what is called “arrears,” meaning that you pay for the use of the money after you use it.

For example, you take out a mortgage loan on April 15. At the time of closing, you will pay interest from that date through April 30.

Your first mortgage payment will typically be due on June 1 and that payment will cover the principal and interest for the month of May.

The payment due on July 1 will cover the principal and interest for the month of June, and so on, until the loan is eventually paid off.

If and when you go to sell the property, even years later, the process will work itself out as in the following example:

You sell your house and the closing date falls on October 8.

You had just made the October 1 payment, which took care of the principal and interest for the month of September.

So, at closing, you only pay the interest for the beginning part of the month.

More questions? Your mortgage pro can help.