When you buy a house and obtain a mortgage, most lenders will let you skip the first monthly payment. If you buy a house in April, you may not have to make your first payment until June 1st or even June 15th. Lenders will make this sound like a huge advantage, but are you really saving money by skipping a mortgage payment? The truth is banks would not give anyone a free month just because banks are nice. Banks charge buyers the interest for that month upfront.
How are you still paying interest to the bank if they allow you to skip your first payment?
Skipping your first mortgage payment isn’t as advantageous as banks and lenders would have you believe. If your mortgage payment is $1,500 a month, it seems like being allowed to wait six weeks to two months to make your first payment is a great deal. However, the bank is still getting their money. When you buy a house, you must pay closing costs, which consist mostly of fees charged for obtaining the loan. Additionally, lenders will charge for an appraisal, origination fees, document preparation fees, and prepaid items. The prepaid items consist of property insurance, property taxes, and interest on the loan.
When you make a mortgage payment, you are paying interest, principal, taxes, and insurance. The taxes and insurance are paid from what is called an escrow account. The bank collects one year’s worth of insurance and property taxes from the borrower so there is enough money in the escrow account to pay insurance and taxes. The bank also collects the interest the borrower owes from the time the loan closes to the time of first payment. The amount of interest collected will depend on the time between the day you close on the mortgage and the day you make your first payment.
So while skipping your first payment may seem great, remember that you are still actually making that payment in advance when you first get your loan.
Is there any advantage to skipping a mortgage payment?
You now know that the bank still gets their money—even when you skip a mortgage payment. However, that does not mean it is not still a good deal for you. There is an advantage to paying all prepaid fees when you first obtain your loan. When you are refinancing a house, you may be able to roll the prepaid items into the loan. You are still paying those fees, but they are financed, which saves you cash when you buy the home. If you are buying a house with a new loan, you may be able to ask the seller to pay part of your closing costs. The borrower is also saving cash in this instance because they will need to bring less cash to closing and can skip their first payment.
So in reality, the borrower is not saving any interest or fees by skipping a payment, but it may allow them to spend less out-of-pocket cash at the time of closing or refinance.
Buying a house takes a lot of cash, and being able to skip a mortgage payment can be advantageous. However, it may not be as big of an advantage as many lenders make it out to be. You are still paying interest upfront, and the bank is making money off your mortgage either way.