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. So why do you get to skip that first mortgage payment?
You still pay interest
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 will save you $1,500. However, the bank is still getting their money.
When you make a mortgage payment, you are paying interest, principal, taxes, and insurance. A portion of that $1,500 is property taxes, insurance, and interest on the loan, and a portion is the principal balance of the loan being paid down. When you skip a payment, the bank is not giving you a break on paying the interest or other items. It is simply paid at a different time.
The bank will collect prepaid items when you buy the house or refinance it. One of those prepaid items is the interest on the loan that is owed until the first payment is made. While you can wait to make that payment, you are still paying interest on the loan, and the prepaid interest you pay at closing will increase the longer it is until your first payment.
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.
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. You still pay those prepaid items at closing, and they may increase as well as the interest paid if you are delaying the payment.
Paying down the loan
Part of the payment is also the principal portion of the loan. While it may not be much, you might pay down the loan $100 or $200 with that $1,500 payment. If you delay making the payment, you will not pay down the loan as fast. This will not be a big deal to most since, if it is a 30-year loan, you will end up paying off the loan 1 month later or 2 weeks later 30 years down the road which is not a major concern to most people.
You can always make extra payments or pay extra towards the principle if you are worried about paying down the loan faster.
Should you skip a payment?
The bank still gets its 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. If the seller is paying part or all of your closing costs, it could be a huge advantage to delay the payment as much as possible.
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 when they complete a 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.
To learn how to get the best deal and make the most money, check out my book: How to Buy a House: What Everyone Should Know Before They Buy or Sell a Home. It is on Amazon as a paperback or Kindle.