"My new lender is offering to skip my first payment.  I’m tempted to do this because it would help our cash flow and I can’t believe it can have more than a miniscule effect on how much I pay over the long pull.  Am I right?"

Allowing the borrower to skip the first payment is not a gift from the lender, the interest not paid for the month will be added to the loan, and the borrower will pay interest on that for the life of the loan.

A payment that is miniscule to one is a fortune to another.  I’ll give you the numbers, then you can answer your own question. They are for a $100,000 30-year loan at 6 %. 

The initial interest payment on a $100,000 loan at 6% is $500. It is .06 times 100,000 divided by 12. If you skip the first payment, the $500 is added to the balance, making it $100,500.  In the following month, your interest payment will be $502.50.  The additional $2.50 is on the $500 you skipped. Further, the interest payment will remain higher throughout the remainder of the life of the loan, relative to what it would have been had you not skipped the first payment.

If your loan runs for the full 30 years, you will end up paying an additional $2993 of interest. If you pay the balance off after 15 years, it will cost $864 in additional interest. If you pay off in 5 or 10 years, it drops to $205 and $486.

To apply these numbers to your own case, multiply them by the ratio of your loan amount to $100,000, and your interest rate to 6%. For example, if your loan is for $200,000 at 4%, you multiply by 2 and by 2/3, to get 1.33. The numbers would then be $273, $648, $1152, and $3991.  Are these miniscule?

Postscript: I received a critical comment on this article for not recognizing that the cost of the skipped payment could be covered, in whole or in part, by earnings on the payment. This assumes that the payment would be invested, which is highly doubtful. Even if the borrower did invest it, the return would have to exceed the mortgage rate for him to come out ahead.

Copyright Jack Guttentag 2007