Understanding Escrow and Per Diem Interest

Understanding the details behind your mortgage is key to being a successful homeowner. Learn about some of the various terms and provisions you will encounter in the closing process.

Mortgage Payments

Your first mortgage payment is due on the first day of the month after closing and includes principal, interest, taxes and insurance. If you close within the first five days of a month, your first payment will be due the very next month.

Some lenders offer a mortgage interest credit option that can push your first payment back. For example, if you use this option and close between January 6 and January 31, your first payment won’t be due until March 1.

Escrow Accounts

Your lender or loan servicer will set up an escrow account in your name after closing. This account is used to pay your real estate taxes and homeowners or hazard insurance. These costs are built into your monthly mortgage payment and when taxes or insurance come due, the loan servicer pays them for you. You’ll receive an escrow statement at least once a year.

GOOD TO KNOW
Due to increases in taxes and insurance, your total monthly payment may rise over time even if your principal and interest stay the same.

Per Diem Interest

This is an adjustment to your first month’s interest payment, calculated from your closing date to the end of the month. Closing later in the month usually means paying less per diem interest. Some lenders may offer an interest credit for closing earlier to help manage end‑of‑month workload. Ask your lender or real estate professional which timing options might save you money.

Learn more about the closing process in our free homebuyer education course!