Closing At The End Of The Month

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Can you really save money by closing at the end of the month?

 

A little background first. Let's compare a mortgage payment to renting.  You generally pay rent at the beginning of the month for the upcoming month - paying in advance. But your mortgage payment generally takes care of the interest that was accrued on the principal balance during the month that just passed.  This is sometimes called paying in arrears.

You can close on a house any day during a month. Let’s say you close on September 15; your initial mortgage payment would be due November 1. That payment includes interest for October. What about the remaining 15 days of September? This interim interest (sometimes called pre-paid interest) is paid at closing. The closer your closing is to the end of the month, the smaller this amount will be.

Renters who are buying a home save money on a late-month closing because they are out of the rental and into their new home before the next month's rent is due.
 
This is what makes closing near the end of the month so appealing to homebuyers. You bring less money to closing.  In many cases, homebuyers are really strapped for cash and they are counting every penny right around closing. Closing near the end of the month can help with immediate cash needs, and it can give the illusion of saving money – but you really don’t save any money in the long term, because the mortgage is still for 30 years (or 15 - whatever your term happens to be) to the day in either case.

Some homebuyers aren’t so sensitive to that one-time interim interest payment at closing, and instead love the fact that their first mortgage payment isn’t due for well over a month. If you are one of these people, then closing just after the month begins is right for you.
   
Interim interest can play a role when it comes to refinancing a home.


Many times a homeowner will calculate the amount needed on a refinance based upon their current mortgage balance plus costs involved. The one calculation most borrowers miss is the accrual of interim interest on the old mortgage. Many times a borrower will call their current mortgage holder at the beginning of a month to find out the amount of their current principal balance - a payoff.

If they wind up closing on their refinance closer to the end of the month, they may be shocked to learn the amount needed to pay off the old mortgage is greater than the original quote - sometimes close to a full mortgage payment greater.

Sometimes individuals who are refinancing won’t make the mortgage payment that is due just prior to closing on a refinance. So if the closing on a refinance were scheduled for September 15, many borrowers do not make the payment due September 1, since most mortgage payments are not late until the 15th. (by the way - we don't recommend this )  Since that payment would pay interest due for August, they now wind up owing interest for the full month of August and half of September at closing.

This can be an unpleasant surprise at the closing table. In order to avoid this, a good rule of thumb is to expect settlement costs (closing costs plus pre-paid interest and escrows) at the time of closing to be higher than expected by the equivalent of one monthly payment.

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Many lenders will often give an "interest credit" in the first 5 days of the month, which is actually a credit for interest during those first five days which is going to be included in the upcoming payment.  Assuming you can obtain such a credit, the first 5 days of the month would then require the least amount of cash to close.

With regard to refinancing an FHA loan.  FHA loans accrue interest to the end of the month regardless of the date they are paid off.  Therefore, when paying off an FHA loan, it is important to time the funding in order to not have to double pay interest.