You have to pay interest accrued between your closing date and the date your first scheduled mortgage payment comes out. Otherwise known as an interest adjustment, this one-time interest charge has to be paid on the Interest Adjustment Date.
Let’s say you just bought a home and your mortgage payments are due on the 1st of each month. If you bought your home for $300,000 on the 15th of October, your lender has to advance you your mortgage loan on that date. But, even though you won’t be making your first payment until November 1, interest starts to accrue on the 15th of October.
Using the example above, and assuming a 2.99% fixed rate, the interest adjustment would be $368.
Example: $300,000 Purchase Price
$300,000 Purchase Price x 2.99% Interest Rate ÷ 365 Days Per Year x 15 days
The Interest Adjustment Date (IAD) is the date by which you must pay your interest adjustment. Set by the lender, the IAD is often the day your mortgage loan is advanced and/or is almost always before the day your first mortgage payment comes out.
To avoid paying an interest adjustment, you can attempt to schedule your closing as close to the adjustment date as possible.
There are a number of ways to pay your interest adjustment. You can pay it at closing, either by paying your lender directly or getting the lender to deduct it from your mortgage loan before they advance it to you. You can ask your lender to make a one-time withdrawal from your bank account, before your first mortgage payment comes out. Or, if the lender allows it, your interest adjustment may also be added to your first regular mortgage payment.