Let’s talk about short pay in the mortgage industry. Now, I’ll start by saying that short pays aren’t done very often. So if you’re watching or reading this, you’re probably either thinking about doing one, or you’re curious and want to learn more. Either way, more power to you for getting informed! But like I said, short pays are rare.

How Does a Typical Mortgage Closing Work?

Before we dive into what a short pay is, let’s talk about what a typical mortgage closing looks like. Imagine someone closes on a house on September 3rd. Doesn’t matter if it’s a purchase or a refinance—let’s stick with a purchase for now to keep things simple.

Here’s what normally happens at closing:

  • The new mortgage company will collect 27 days of interest (from September 3rd to the 30th).
  • This interest is collected at closing, and the homebuyer, let’s call him Joe, will have to write a check for those 27 days of interest.

Why does this happen? Well, mortgage payments are paid in arrears, which means they cover the previous month’s interest.

So, in Joe’s case, he wouldn’t make his first mortgage payment until November. That November payment is actually covering October’s interest. Joe has already paid for September’s interest at closing, so he skips the October payment entirely.

What Is a Short Pay?

Now that you understand how a typical closing works, let’s dive into what a short pay is. A short pay is used when someone needs to reduce the amount of cash they need to bring to closing—usually because they’re tight on funds.

Here’s how it works:

  • Closing in the first five days of the month: To do a short pay, the closing typically needs to happen in the first five days of the month. This is important.
  • Interest credit instead of payment: Instead of paying 27 days of interest, like in our previous example, Joe would actually get a credit for the three days of interest (from September 1st to the 3rd).
  • Reduced closing costs: This credit reduces the amount Joe needs to bring to closing, so he’s saving some cash upfront. But there’s a catch—Joe’s first mortgage payment will now be due in October, not November.

Why Does the Payment Move Up?

Here’s the important part to remember: because Joe got a credit for the three days of interest, he’s not paying a single day of interest in September. So, when October rolls around, his payment will cover the interest for September. Joe doesn’t get a free lunch here—he’s still going to make his payments, just earlier than if he had gone with a normal closing.

In this example, Joe comes to the closing table with less money but starts making payments sooner, giving him a little more flexibility upfront. This can help if Joe needs extra time to build up his cash reserves.

When Should You Consider a Short Pay?

Short pays aren’t for everyone, and most people won’t need them. But there are times when it makes sense:

  • Tight on cash at closing: If you’re tight on cash and need to save money upfront, a short pay can help reduce how much you need to bring to the table.
  • Need extra time to build cash reserves: Maybe you’ve got some upcoming expenses, and delaying your mortgage payment for a month could help.

That said, short pays are typically rare, even in refinances. We don’t often recommend them unless it’s absolutely necessary to save cash.

The Bottom Line

Most homebuyers and those refinancing won’t need to worry about short pays, but now you know what they are. If you have questions about whether a short pay makes sense for your situation, feel free to reach out. The Mortgage Mark Team is here to help walk you through it.

And as always, when you think mortgage, think Mark!

mark pfeiffer

Mark Pfeiffer

Branch Manager
Loan Officer, NMLS # 729612
(972) 829-8639
MortgageMark@MortgageMark.com

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