A mortgage is awarded before current interest begins to accumulate. This means that you will be in possession of your lender’s money for a period of time and before it recovers money with interest. The interest adjustment allows your lenders to be reimbursed for the interest they should have earned during this period.
The interest adjustment date (IAD) usually falls on the first day of the month following the distribution of your mortgage funds. This is the day from which your interest begins to accumulate. If you have chosen the monthly payments, you will make your first mortgage payment one month after your DAI. If you have chosen bi-weekly payments, you will pay your first mortgage payment two weeks after your DAI
The Interest Adjustment Amount (MAI) is the amount of daily interest accrued from the Closing Date to your Maturity Date. You will pay your MAI as a lump sum during the closing process. This is one of the many closing costs you will need to cover.
For example, if Sam bought a house for $ 200,000 and his closing date is June 15 and his interest adjustment date (DAI) is July 1, what happens to all interest earned between these days? On the closing date, June 15, the lender will advance the mortgage, so that the real estate agent pays the previous owners. Interest accrued between June 15 and July 1 will be pre-calculated and recorded in closing costs, this is the MAY. So, Sam will make his first mortgage payment on August 1st, one month after his DAI.
Why do I have to pay an interest adjustment?
You must pay an interest adjustment when your closing date does not fall on the first day of the month. As most closing dates do not fall on the first of the month, the majority of buyers will have to pay an interest adjustment. On your closing date, your lender advances your mortgage, but technically interest will not accrue until the first of the following month. However, you still have to pay 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.
To find your interest adjustment amount
- Calculate the total mortgage interest rate per year
$ 200,000 x 2.67% = $ 5340 (purchase price x mortgage rate)
- Calculate the mortgage interest rate per day
$ 5340 ÷ 365 days a year = $ 14.60
- Calculate the mortgage interest rate for the number of days 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 occurs only once at the beginning of your mortgage, it is still a closing cost that you will need to consider when buying a mortgage. a house. Make sure you include this in your home buying budget because it is a hidden cost that can easily be forgotten. In addition, the interest adjustment price can vary considerably, increasing or decreasing according to your interest rate. If you want to avoid this cost, schedule your closing date so that it falls on or very close to your interest adjustment date (the 1st of the following month). However, this may not be possible because there are many external variables that affect your closing date.
How can I pay my interest?
Your interest adjustment amount is part of your closing costs and will therefore be paid on the closing date. Another option is to allow your lender to withdraw this amount from your bank account on the 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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