Skipping the First Payment

In order to get more business, many lenders offer promotions or “gimmicks” to increase business. One such gimmick is the offer to let the borrower skip the first month’s mortgage payment. Many people are tempted by the offer, and do not take the time to fully understand its benefits and costs.

Monthly payments on an amortized mortgage are set up for the loan to pay off at the end of the term. The first payment includes mostly the first month’s interest, and a small amount of the payment goes toward lowering the loan’s balance. When you skip the first payment, the lender doesn’t simply forgive this interest amount, and definitely does not deduct the small amount of principal you would have paid.

Instead, the lender adds the unpaid interest to the body of the loan. For example, suppose you have a loan for $100,000 at six percent interest over a 30 year term. When you skip the first payment, the $500 in interest you would have paid is added to the loan’s balance, making your new balance $100,500. The next month, your interest payment will be $502.50 (the extra $2.50 is a surcharge because of the $500 added to the balance).

If you keep your mortgage for the entire 30-year term, you will pay an additional $2993 in interest as a result of skipping your first payment. If you keep the mortgage for a shorter amount of time, you may still have to pay extra interest. If you have the loan for 15 years, you will end up paying an extra $864, and will pay an extra $486 if you have it for ten years. Even if you only keep your mortgage five years, you will pay an additional $205 in interest.

From these numbers, you can see that even a small change that seems advantageous to you as a borrower, such as skipping the first month’s payment, may end up costing you a good deal in the end. Unless you can invest the savings at a higher rate of return, skipping the first payment isn’t worth the accompanying hassles.