What Is an Interest Adjustment on a Mortgage?

An interest adjustment is a common, one-time charge new homeowners encounter. It is a standard part of the mortgage process that addresses the timing gap between when you officially take ownership of your home and when your first regular mortgage payment is due. This charge is not a penalty, but rather a mechanism lenders use to account for interest costs during this interim period.

Defining the Interest Adjustment and Interest Adjustment Date

The purpose of an interest adjustment is to cover the interest that accrues on your mortgage principal from the day your home purchase closes until your regular payment schedule officially begins. When you close on a home, the lender advances the full mortgage amount to the seller, and interest begins to accumulate on that principal immediately. However, your first scheduled mortgage payment is often not due until a later date, creating a gap where interest is owed.

This gap is bridged by the Interest Adjustment Date (IAD). The IAD is the date set by your lender that marks the beginning of your first official mortgage payment cycle. The interest adjustment payment covers the interest accrued between your closing date and the IAD. For example, if you close on June 15th and your first mortgage payment is scheduled for August 1st, the IAD would likely be July 1st. The interest adjustment would then cover the interest for the period from June 15th to June 30th.

Calculating the Interest Adjustment Amount

The calculation for the interest adjustment amount is based on a few key figures from your mortgage agreement. First, you must determine the number of days between your closing date and the Interest Adjustment Date. Using a hypothetical scenario, if your mortgage funds are advanced on June 15th and your IAD is July 1st, the adjustment period is 15 days. This count excludes the IAD itself.

Next, the daily interest rate is found by dividing your annual interest rate by 365 days. For a mortgage with a 5% annual interest rate, the daily rate would be 0.0137% (0.05 ÷ 365). This per diem rate is then multiplied by your total mortgage principal. If you have a $400,000 mortgage, the daily interest cost would be $54.79 ($400,000 x 0.000137).

Finally, to find the total interest adjustment amount, you multiply the daily interest cost by the number of days in the adjustment period. In this example, the total adjustment would be $821.85 ($54.79 x 15 days).

Managing Your Interest Adjustment Payment

The interest adjustment payment is typically due on the Interest Adjustment Date itself. Lenders often collect this amount through a separate, automatic withdrawal from your bank account just before your first regular mortgage payment is scheduled to be withdrawn. This ensures the interest is settled before the standard amortization of your loan commences.

It is possible to minimize the size of this one-time payment by strategically scheduling your closing date. By coordinating with your lawyer and lender, you can try to set a closing date that is closer to the first of the month, which is a common IAD for many lenders. A shorter gap between the closing date and the IAD means fewer days of accrued interest, resulting in a smaller interest adjustment amount.

In some cases, lenders may offer flexibility in how this payment is handled. You might be able to pay the amount on your closing date along with other closing costs or have it added to your first scheduled mortgage payment. Discussing these options with your lender in advance allows you to plan for the payment and choose the method that best fits your financial situation.