What Is an Odd-Days Interest?
Odd-days interest is the term used to describe interest due on a mortgage to cover an initial, partial month payment before regularly scheduled payments begin. The situation arises because most mortgages have payments scheduled to be due on the first of every month. However, mortgage closings may occur on any weekday during the month. Moreover, closings can be delayed for any number of reasons, impacting the interest due. As a result, almost all mortgages include an odd-days interest payment, which is known as interim interest.
Understanding Odd-Days Interest
Odd-days interest is necessary because there are no free-of-interest days in an installment loan. The amortization of the principal loan amount is across the scheduled monthly payments for the term of the note. The interest clock starts ticking as soon as funds transfer to the borrower. Thus, the calculations for odd-days interest do not include any principal payment.
The Long and Short of Odd-Days Interest Payment
The funds accumulated during the odd-days interest period, between the settlement of the loan and the beginning of the first full payment month, is known as the interest shortfall. Processing of these funds happens in one of three ways.
- With origination means the shortfall is due at the closing
- With first means, the shortfall is due with the first regular monthly payment
- Amortized means the shortfall will be spread out over the length of the loan, making all payments slightly higher
The interim interest shortfall payment can be either a long-first-period or short-first-period payment. The type will depend on the language of the contract, and when the closing takes place.
- In a long-first-period, the closing occurs before the first regular month of the loan. For example, the Smith family had a settlement closing on September 20, with the first full month, October payment, due on November 1. The Smith's will owe an interest shortfall for the last ten days in September (21st-30th).
- In a short-first-period, the closing comes after the first of the month listed on the contract as the first regular payment period. In this case, the title company delays the Smith's closing until October 11. Now the borrower is entitled to a refund of interest for the first ten days in October. Here the lender might reduce the first monthly payment, amortize the reduction over all the loan payments, or apply it to the principal balance. If deducted from the principal balance, it will slightly reduce the monthly payments.
Surprise Payments at the Closing
A problem for borrowers is that it is often not possible to predict the exact date of a closing. Several factors could force the settlement date to move. Thus, to know precisely how much odd-days interest will be due at closing is hard to determine with accuracy. However, lenders will be able to tell borrowers how they plan to calculate and adjust for the interim interest payment.