Learning the concept of payment in arrearsLots of homeowners look at their monthly mortgage statement and think that the current balance is how much is owed to repay the loan in full. In reality, the interest on a mortgage is paid in arrears, which means the balance is always less than the payoff amount. A payment in arrears indicates that the monthly payment is paying the interest for the past month. For example; the interest for April is really paid from the May mortgage payment. In comparison to a utility bill such as an cable TV or power bill that is paid a month after the service is used.

Anytime a mortgage is to be paid off, the actual amount owed is greater than the current balance. A specific rate of interest is added per day between the last mortgage payment and the date the loan will be paid off. Many people go through this on a refinance or when they sell their existing home.

The misconception of skipping a mortgage paymentWhen a borrower gets a new mortgage for buying or refinancing a home, they usually have to pay prepaid interest , often called per diem interest. Prepaid interest is a prorated amount of interest computed by the number of days still left in that month and the associated rate of interest.

Prepaid interest is like a partial mortgage payment paid in advance and causes you to have the 1st of the month passing one time without a mortgage payment. Many borrowers consider this as "skipping" a payment, but the truth is that the interest was already paid through prepaid interest on the date the loan closed.