One of the most common surprises for first-time buyers is something called short interest. It shows up on your closing disclosure, and if you weren’t expecting it, you might find yourself short on cash at the worst possible time.
The good news? With a little math, you can estimate it yourself ahead of time and avoid being blindsided.
What Is Short Interest Again?
Mortgage interest is always paid in arrears — meaning you pay for the month that just passed, not the one you’re in.
So if you close on July 15th, your first full mortgage payment won’t be due until September 1st (for the month of August). But what about those days in July when you already borrowed the money? That interest doesn’t just disappear — it’s collected upfront at closing as short interest.
How to Estimate It
Here’s the simple math:
- Get your loan amount (let’s assume $400,000).
- Find your interest rate (say 7%).
- Calculate your daily interest:
- $400,000 × 7% = $28,000 annually
- $28,000 ÷ 365 = about $77 per day
- Count the days from your closing date to the end of the month.
- Multiply the daily interest by those days.
Example: July Closing
Closing Date |
Days of Short Interest |
Short Interest Due |
|---|---|---|
| July 2 | 30 days | $2,310 |
| July 15 | 16 days | $1,232 |
| July 27 | 5 days | $385 |
Why It Matters
That’s a swing of nearly $2,000 depending on when in the month you close. If you’re budgeting to the penny, you don’t want to be surprised at the settlement table.
House Karma Tip
You can’t avoid short interest, but you can control it by choosing your closing date wisely. If money’s tight, aim for the end of the month. Just make sure your lender and seller are ready, so you don’t slip into the next month and end up owing even more.
Bottom line: Estimating short interest takes five minutes, but it can save you from a big surprise at closing.
