What Is Interest In Arrears

A refinance will often reflect a higher payoff of a previous mortgage than expected. This is due to "Interest in Arrears". Interest in arrears is the interest that was due in the previous month.

When you payoff the mortgage you must pay the arrears as well.

Interest accumulates daily. The amount of interest per day is called "per diem". The final payoff includes principal balance and a certain amount of per diem interest dependent upon the date the lender receives the check.

Mortgage payments are done in arrears. When you rent and your payment is due on the first of April, that payment is so you can live in the place for the month of April. When you pay a mortgage on the first of April, you are paying for the interest from March 1st - 31st. When you pay May 1st's mortgage payment, that covers the interest for the entire month of April. This process is called paying mortgage interest in arrears.

Here is an example in order to make this concept simple. You make a mortgage payment on May 1st. That payment covers the interest on the loan that accumulated during the month of April. You then refinance your home and the refinance closes on May 25th. As part of the payoff of your old loan you will be required to pay the "arrearage", meaning the interest accumulated from May 1st to May 25th. This of course in addition to the balance due on the loan and any other assorted payoff fees that the lender may charge.

If you have failed to make your mortgage payment in several months, you should plan on your payoff coming in considerably higher because of this. Often times this can kill a deal if you are maxed out on your loan to value.