What does the mortgage being “paid in arrears” mean?
Posted on Wednesday, August 1st, 2007 at 5:07 pm.Mortgage payments are made in arrears. Here's what that means:
Let's say that Jane Doe buys a house and she settles on June 15th. Her first mortgage payment won't be until August 1st. Here's why:
Jane will be making a mortgage payment on August 1st to cover the time she was in the house from July 1st to July 31st. This is known as paying in "arrears", where you're paying for time you've already spent in the property.
But then the period from June 15th to June 30th also has to be covered. The way that's handled is that it's charged to the borrower at settlement, on June 15th. So at settlement, the buyer pays for the first 15 days of home ownership, and then on August 1st the buyer pays for the month of July, and it continues from there.
If you're a renter, this might be very strange to you, because rent is paid at the beginning of the month for the upcoming month. But mortgage is paid at the end of the month for the time that just passed.
Because of the way this system works, it's cheaper from a cash-flow perspective to settle at the end of the month than it is to settle at the beginning of the month, because if you were to settle, say on June 10th, you'd have to pay for the period of June 10th to June 30th at the settlement table, with your first mortgage payment due on August 1st, and if you were to settle on June 25th, you'd pay for the period of June 25th to June 30th at the settlement table, with the first mortgage payment still being due on August 1st.
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October 3rd, 2007 at 9:56 am
Well put. There are clients who have a hard time understanding.
October 3rd, 2007 at 10:02 am
Great post and very informative, I really enjoyed reading your post.
Thanks for sharing it!