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?