Simply look at it this way. The money that is given to you to either refinance or purchase a home is charge on a per-day basis. This is called “per diem” from the Latin word meaning “per day”. This is the rule in the industry and there is no such thing as getting the 1st month payment-free or any other such bogus offers. If a broker advertises such an offer, run away quickly.
Here is what happens: The rate is quoted per year, but the lender actually divides it by 365. This is the amount they charge you per day. If your closing occurs at the end of the month - when many closings do - they will charge one or two days, depending upon your cost on the last or second to last day of that month. So you will see an amount next to interest, it is very small in this case.
Here I will do the math for you:
Assume $200000 loan amount. at 7%
To get the yearly interest $200000 x 0.07=$14000 <–the amount you pay per year interest.
Take this amount and divide it by 365 to get per day
$14000 / 365= 38.35
So if you close on the last day of month, this amount is charged at closing.
The reason there is “no payment” is that the lender cannot charge you upfront for something that has not happened yet. So during your first month, your interest is compounded on a daily. Then at the beginning of the next month, you get a bill demanding a payment.
All of this results in a little confusion when it’s time to payoff the mortgage. I have clients who are tell me they have a balance of one amount only to be told by the lender that it is a little bit more, like a thousand more in this case. Unfortunately, this happens because people get their statement at the beginning of the month and close on the end of the month.