Interest Adjustment Date
Mortgage payments are made in arrears. In other words, when each payment period is over, lenders look back and calculate their interest based on the money you owed during that period.
The interest adjustment date is the date from which your lender first starts calculating the normal ongoing interest that you’ll pay.
Interest adjustment dates tend to commonly fall on the 1stday of the month after mortgage funds are advanced to the borrower.
For example, suppose you close your mortgage on April 25 and have signed up for monthly payments. Here is how the dates might stack up:
April 25: Mortgage starts (a.k.a. the closing date)
May 1: Interest adjustment date
June 1: First payment date
Your first payment on June 1 will therefore be based on the interest that accrued since your interest adjustment date (i.e. from May 1 to May 31).
If you plan to make bi-weekly payments, then instead of one month after, your first payment would be two weeks after the interest adjustment date.
Before the interest adjustment date, however, you will have held the lender’s money for a period of time. In the example above, this period would have been April 25 to April 30.
Lenders like to get paid for this time. As a result, lenders charge a one-time amount of pro-rated interest to cover it. This interest-only payment is called an “interest adjustment.” It compensates the lender for the time you held their money before your first official payment period began.
Lawyers and notaries routinely collect interest adjustments at closing. Confirm this when you discuss your closing costs with them.
Keep in mind, it is possible to avoid interest adjustments altogether. To do so, you need to schedule your first mortgage payment exactly one payment period (e.g. one month) after your closing date.