When is your First Mortgage Payment Due?
It’s a question that many homebuyers ask, one that’s on the lips of countless American families seeking to buy their first home: When is my first mortgage payment due?
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In this guide, we’ll answer that question, look at the possibilities, and seek to understand just why first-time buyers are so desperate to know the answer to this question.
When is the First Monthly Mortgage Payment Due?
The mortgage begins on the day that the contract is signed. At this point, the transaction has completed, and the loan contract begins in earnest. Your first payment is due exactly one month after the last day of the closing month.
For instance, if you close your mortgage on April 25th, your first mortgage payment will be due on June 1st. Mortgage payments are paid in arrears, which means the amount you pay covers the fees accrued from the previous month. In the aforementioned case, your first payment will cover the full month of May as well as the amount accrued from the closing date to the end of the month.
You have some control over when you make your monthly payment, as you can manipulate the closing date to a more suitable day of the month. For instance, if you need a little more time, you can close on April 4th or 5th instead. That way, you will have close to 60 days before you’re required to make your first payment. Of course, that also means nearly 60 days of interest, but if the closing costs and moving costs have left you short, it could provide the help you need.
Alternatively, if the closing date occurs at the end of the month, you’ll have less time to wait before your first mortgage payment is due.
When is a Mortgage Late?
Mortgage lenders won’t report a late payment to the credit bureaus if you have missed just a day or two. You may be charged late fees, but generally, you will have a grace period of up to 30 days. If you make the payment in full during this time, you can get back on track and continue, with no derogatory marks hitting your credit report. If not, you run the risk of accruing late fees and other penalties, and your house is also at risk.
A mortgage payment is always due at the beginning of the month, so if you haven’t paid by the second or the third, you’re probably late and are on a very slippery slope.
What Goes into a Mortgage Payment?
All mortgage payments are made on the first of the month. These payments typically consist of the following:
- Interest Payments: Mortgage interest is essentially the lender’s fee. It does not compound like credit card debt, but the bulk of your early mortgage payments will go towards interest.
- Principal Payment: In the first few years, a small percentage of your monthly payment will go towards the principal balance, allowing you to build equity in your home and own more of the house.
- Private Mortgage Insurance: PMI is collected yearly and covers the mortgage lender in the event that you default on your loan and they are forced to initiate the foreclosure process. These payments generally add up to $100 to your monthly mortgage payment, with the money then remaining in an Escrow account until it reaches the required sum.
- Property Taxes: As with PMI, property taxes are paid annually and held in Escrow. These fees can differ greatly from state to state and are typically fixed as a percentage of the home’s value. In most cases, you will pay around 1% of the value every year.
If your home is worth $200,000, your taxes will be $2,000 a year.
How Much of Your Mortgage Payment is Principal?
We mentioned that a large percentage of your initial mortgage payment goes towards interest. This is something that very few first-time homebuyers realize, but if your goal is to build equity as quickly as possible, it’s important to understand this simple truth before you sign on the dotted line.
As an example, let’s assume that you have your sights set on a $350,000 house and you have a $50,000 down payment. You’re offered a 4% interest rate over a 30-year term. This equates to a monthly mortgage payment of $1,432,25. In the very first month, exactly $1,000 of this payment will go towards interest, which leaves around 30% of the remaining sum for the principal.
After 5 years, you’ll pay exactly the same sum every month, but now $906 will go towards the interest, with the rest going on principal payments. A few years past the half-way point, more of your payments will target principal than interest, and by the time you reach the final few months, the tables will have turned, and the majority of your money will target the principal.
Of course, this doesn’t include PMI and property taxes, both of which will increase your monthly payment. But if gives you an idea of just where your money is going and just how hard it is to build equity in the early stages of your loan.
Bottom Line: How to Build Equity Quickly
The above calculation is based on a specific rate of interest and a prolonged term. It also assumes a 16% down payment, which is actually quite substantial, but still less than the recommended amount.
If you had a better credit score, compared a few more lenders, and acquired an interest rate that was just 0.5% less, you’d reduce your costs substantially.
If you made a down payment of 20%, just $10,000 more, you wouldn’t need to pay PMI and you could shave $10,000 of your mortgage loan.
These small changes would remove nearly $150 from your monthly payment and save over $35,000 in total interest. If you were to go that one step further and reduce the 30-year term to 15-years, you’d have a monthly payment in excess of $2,000, but your very first payment would be a 60/40 split in favor of the principal.
This means you’ll clear the full amount much sooner and own more than 50% of your new home in less than half the time.