A mortgage loan is distributed before normal ongoing interest starts to accumulate. This means that you’ll be in possession of your lender’s money for a period of time and your lender won’t be earning any interest. Interest Adjustment allows your lenders to get paid the interest they’re owed for this period of time.
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The interest adjustment date (IAD) typically falls on the first day of the month following the distribution of your mortgage funds. It’s the day from which your interest starts to be accrued. If you’ve chosen monthly payments, you’ll make your first mortgage payment one month after your IAD. If you’ve chosen bi-weekly payments, you’ll payment make your first mortgage payment two weeks after your IAD.
The interest adjustment amount (IAM) is the amount of daily interest accumulated, starting from the closing date until your IAD. You’ll pay your IAM as a lump sum during the closing process. It’s one of the many closing costs you’ll need to cover.
For example, if Sam bought a home for $200,000 and his closing date is on June 15th and his Interest Adjustment Date (IAD) is on July 1st, what happens to all the interest gained in between these days? On the closing date, June 15th, his lender will advance his mortgage loan, in order for the real estate agent to pay the previous homeowners. The interest accumulated between June 15th and July 1st will be pre-calculated and accounted for in his closing costs, this is his IAM. Thus, he’ll make his first mortgage payment on August 1st, one month after his IAD.
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Why do I Have to Pay an Interest Adjustment?
You have to pay an Interest Adjustment when your closing date doesn’t fall on the first day of the month. Since most closing dates don’t fall on the fist of the month, the majority of homebuyers will have to pay an Interest Adjustment.
On your closing date, your lender advances your mortgage loan, but technically interest doesn’t start accruing until the first of the next month. However, you’re still for paying the interest earned between your closing date and the interest adjustment date, which is why you have to pay an interest adjustment amount. The interest adjustment amount is a one-time payment, which is included in your closing costs. Once this is paid, you will start making your regular, monthly mortgage payments.
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To Find Your Interest Adjustment Amount
1. Calculate the total mortgage interest rate per year
$200,000 x 2.67% = $5340 (Purchase price x mortgage rate)
2. Calculate the mortgage interest rate per day
$5340÷365 days/year = $14.60
3. Calculate the mortgage interest rate for the number of days in between your closing date and your interest adjustment date
$14.6 x 15 days = $219
Even though the interest adjustment amount is very small and only happens once at the beginning of your mortgage, it is still a closing cost that you must consider when buying a house. Make sure to include this in your home buying budget, as it’s a hidden cost that be easily be forgotten. Additionally, the interest adjustment price can vary significantly, increasing or decreasing depending on your interest rate. If you want to avoid this cost, schedule your closing date so that it is on or very close to your Interest Adjustment Date (the 1st of the following month). However, this may not be an option, as there are many external variables that affect your closing date.
How Do I Pay My Interest Adjustment?
Your Interest Adjustment amount is part of your closing costs and therefore will be paid on your closing date. Another option is to allow your lender to withdraw that amount from your bank account on your Interest Adjustment Date. In some cases, it may also be possible to add your Interest Adjustment amount to your first mortgage payment.
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