Why
close at the end of the month?
When you close on a home, you’re required to prepay any
interest that will accrue on your mortgage from the date of the
transaction until the end of the month. So the closer your
closing is to the end of the month, the less you have to pay.
The reason for this is that unlike rent, which is often paid
in advance for the upcoming month, mortgage payments are
generally paid in arrears to cover the previous month. If you
close in April, your first mortgage payment won’t be due until
June 1 -- the start of the first full month afterwards. That
payment will include the interest and principal you owe for May.
But interest accrues from the date of closing. If you close
April 15, you will also owe 15 days of interest for April. Your
lender will therefore add this amount (sometimes called pre-paid
interest) to your closing costs. If you close April 29, you will
only be charged for two days of interest. Here’s an example of
how it works:
Example of up-front savings:
Mortgage amount: $200,000
Interest rate: 7%
Daily interest: ($200,000 x 7%) = $38.36
Close April 15: prepay 15 days interest (15 x $38.36) =
$575.40
Close April 29: prepay 2 days interest (2 x $38.36) =
$76.72
The exact amount you save changes if your closing date
changes. If you expect to close on, say, April 29, but the
closing is pushed back to May 5, then your prepaid interest
closing costs will change dramatically. That’s one reason why
people sometimes see big fluctuations in closing costs from the
figures originally quoted in the Good Faith Estimate (GFE) they
received from their lender.
Long-term balance out:
Closing later in the month can be helpful in reducing your
up-front closing costs at a time when you may be strapped for
cash. But its impact is only short-term. Your overall interest
charges for a 30-year mortgage (or whatever term you choose)
will be identical regardless of what day you close (assuming the
same mortgage rate). The total interest you pay is based upon
the length of the term, not the day you close. Whatever extra
you pay at the start, you will save at the finish.
The end of the month can also be a very busy time for closing
agents and mortgage lenders. Avoiding this time could mean
you’ll receive more personal attention. Plus, it will give you
a few more days before you have to come up with your first
mortgage payment. So don’t despair if you have to close early
in the month -- some advisors even recommend it.
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