Odd Days Interest
What it is:
How it works (Example):
For example, let's assume that John obtains a mortgage from his bank, and the monthly interest and principal payments will be $2,500. The bank requires mortgagees to make their monthly interest and principal payments on the first of the month.
Due to the circumstances of the purchase of his house, John's mortgage is going to close on the 10th of June. He is therefore responsible for the interest that accrues for the rest of that month -- from June 11 to June 30. This amount totals $300. Most banks will either tack this odd days interest onto John's first interest and principal payment of $2,500, or they may require him to pay the $300 at closing.
Why it Matters:
One of the important aspects of odd days interest is that the amount is usually unknown until the day the mortgage actually closes. For this reason, lenders often leave odd days interest off of the good faith estimates that they must provide to borrowers regarding lending expenses. Therefore, borrowers must be aware that they might have to come to the closing table with hundreds if not thousands more dollars than they originally expected, depending on the day their loans close.