Why You Want to Close Your Mortgage at the End of the Month

by Kevin on May 3, 2009

Both when we first bought our house and just recently when we refinanced, we were told that you want to close the new mortgage paperwork at the end of the month. Have you heard the same thing and wondered why?

Closing Later Saves Pre-Paid Interest

Here’s how your typical closing works. Let’s say you close on the 15th of the April. Your first payment to the mortgage will be due on June 1st — a whole 45 days from the time you close. Your June 1st payment includes the principle and interest charges for May (essentially you pay for the previous month).

If you close on the 15th of April and your first payment isn’t due until June 1st, the bank has essentially lent you money for the last 15 days of April (otherwise you would have a payment due May 1st). Thus the bank charges you pre-paid interest for this loan period from whenever you close to the first of the following month.

If that sounds like a lot of mortgage jibberish, how about an example?

Let’s say your daily pre-paid interest cost is $20. Fifteen days multiplied by $20/day in pre-paid interest is $300. This amount is tacked on to your closing costs.

If you close later in the month your payment will still be due on June 1st, but you’ll pay less in pre-paid interest at closing. If you close on the 24th your pre-paid interest drops from $300 to $120 (6 days). The later in the month the better.

Closing at End of Month Saves Upfront

In the above example you saved $180 by pushing your closing back 9 days. You save money on the front end by doing this — but not really over the life of the loan. The amount of interest you pay ends up being the same, but what you have to bring to the table in terms of closing costs is obviously less. For every day you push closing back, you save $20 in up front costs.

The Downside to Closing at the End of the Month

Closing toward the end of the month is a good idea, but you can run into some problems. (Yes, I am speaking from experience here.)

You see the end of the month is when everyone wants to close. They’ve been told the same thing I just told you. Your bank’s closing department is absolutely swamped at the end of every month. Busy workers means less personal attention or the possibility of issues popping up.

Here’s our story. We were supposed to close on our refinance on April 24th. We chose the 24th because refinance loans take four business days to “fund”. We would only end up paying 2 days of pre-paid interest.

Unfortunately when our loan was sent to underwriting they requested additional appraisal information. This was the day before we were supposed to close. The appraisal information was sent in, but since it was the end of the month the departments involved were simply too busy to turn the loan around in less than 24 hours. We got a call and had to push our closing back.

It turns out that wasn’t that big of a deal, but it was a hitch. Any hitch in your loan processing will be amplified if it is at the end of the month.

A question for homeowners out there: did you close at the end of the month? Did you know why, or were just following the advice of your realtor/lender?

{ 10 comments… read them below or add one }

Finance Nerd May 4, 2009 at 4:34 am

I have closed at the very beginning of a month before (2nd or 3rd, IIRC) and they actually paid me interest back to the first, and had my first payment due the first of the following month. In other words, instead of getting a month plus, I got just under a month.

I’m not sure how common this is, or how far into the month they will do this, but it has happened to me at least once.

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Kevin May 4, 2009 at 5:58 am

@Finance Nerd: That is correct. IT’s called and interest credit. This is what we ended up having to do because they pushed the closing date back. Initially I was concerned because I’d never heard of that, but once I did some research I relaxed a little.

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kim May 5, 2009 at 7:26 am

I recently applied to refinance my home with our local bank. When talking with my father he had mentioned that by paying a principal payment at the beginning of the loan, that would take 5 years off the loan. Is that true? When would that have to be paid? At closing or separate after the closing?

Your help would be greatly appreciated. Thank you!

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Kevin May 5, 2009 at 7:34 am

@Kim: There are a lot of variables that you haven’t given so I can’t fully answer the question. I would need to know the loan amount, the interest rate, and the length of the term (how many years for the mortgage).

But, generally speaking, yes you can cut a huge amount of time off your loan by paying additional principal. You can do this a little bit each month or a lot at one time, or a mixture of both. I’ll write up a quick post to address your question and post it up later today.

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DL May 5, 2009 at 8:17 pm

I understand your logic, but it is flawed. Think of your mortgage on a per diem basis. Regardless of when you close, you will be charged the per diem interest rate on the old loan and the new loan.

For this reason, if you are refinancing to a lower interest rate it is more beneficial to close earlier in the month. The per diem interest rate on the new loan will be lower than the per diem rate on the old loan. For example, if the per diem rate on the old loan was $25/day and the new loan it is $20/day, and you close on the 15th of the month, your final closing costs would be calculated as follows:

Payoff: Payoff(x) + $25×15 days = x + $375
Prepaid Interest: $20×15 days = $300

You see the per diem is either applied to the payoff or your prepaid interest. By closing at the end of the month your payoff will be higher, ultimately resulting in the total funds needs for closing being higher. If we are strictly talking financial benefit, it would make the most sense to close on the 1st of the month, prepay the interest for the entire month, then have your first mortgage payment due the following month. However, most borrowers do not have the extra funds available to bring such a large sum of money to closing.

Hope this helps!

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Kyle May 5, 2009 at 9:15 pm

I just closed 4/29 on my refinance. I actually ended up having a negative prepaid interest on the loan which was pretty sweet. We definitely tried to shoot for the end of the month but in fact were supposed to close a week earlier and our loan got audited by the underwriters so it held it up. Glad it got held up though cause it saved me a little out of pocket money.

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Leaidan July 12, 2011 at 12:28 pm

This is the perfect way to break down this ifnroamtion.

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DL May 6, 2009 at 8:02 am

Kyle – what appeared to be negative interest was actually your new mortgage company crediting you back for a few days of interest on the new loan. Because the new loan interest begins on the 1st of the month but your old loan was not paid off until maybe the 2nd or 3rd. In that case, your new lender credits you back 1-2 days of interest so you are not paying double the interest (on your old loan and your new loan) for that period of time. What appears to be negative interest is actually your new company crediting you.

Think of it this way, do you think your mortgage company would actually pay YOU interest to live in your house? It would be nice, but mortgage companies don’t think that way.

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Karen June 22, 2012 at 7:00 am

I closed on a re-finance 5/25. The new lender did not get the payment to the 1st lender to payoff the orig mortgage until 5/29. The new lender started my new mortgage payments as of 6/25. How is this at all ethical that the new lender is already making money off of me when the 1st lender has not been paid off? I am double paying interest to 2 lenders for 2 mortgages for 1 property. Seems very unethical to me. The President of this bank did not think so…he says it is done all the time!

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Finance Nerd June 22, 2012 at 7:16 am

Karen,
In many (all?) states, there is a 3 day rescission period on refinances. This means that you as the borrower can change your mind in the first 3 days, and the loan is cancelled. Because of this, the loan is not funded until the rescission period expires. So, closing on 5/25 and not paying off until the 29th is typical. The new loan doesn’t start until it is funded, and the old one doesn’t end until it is paid off, so there is no double counting.

The new payments starting 6/25 does not mean anything, that is just the day the payment is due, but interest will only be charged from 5/29 to 6/25 in this case.

May be confusing, but you are not being double-charged.

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