To milk all they can out of their final rent check, first-time home buyers often try to schedule their closings as close to the end of the month as possible.
But there's another reason practically all buyers, not just rookies, prefer to settle late in the month: interest. The later you close, the less interest that's due to the lender. And that means you'll need less cash.
Mortgage interest is collected in arrears. So if the loan begins on the first of the month, borrowers are required to pay interest from the settlement date until the end of the month. The fewer days left in the month, the less interest you'll have to pay.
That's why perhaps 95% of all real-estate closings take place during the last week of the month, many on the last day. After all, money is a big consideration for most people.
But if a few hundred dollars extra won't put a dent in your budget, you might want to consider closing earlier, suggested Dave Hershman, regional director of Mortgage Access in Centreville, Va.
"With everybody trying to settle at the same time, escrow officers are extremely busy," Hershman said. "They try to accommodate everyone they can, but in the process, they tend to provide the least amount of service."
No Real Savings
And it's not just escrow officers either. It's everyone down the line--appraisers, surveyors, insurance agents, even lenders, Hershman said. "It's a chain reaction; you get poor service from everyone at the end of the month."
If cash is in short supply, go with the flow. But realize that your first full mortgage payment will be due sooner rather than later. Here's how it works:
Say you close on Oct. 28. You'll have to pay three days worth of interest--Oct. 29, 30 and 31--that ordinarily would be due with your November payment. It's called prepaid interest.
If you choose to close on Oct. 15, you'll owe 16 days worth of prepaid interest, from Oct. 16 through Oct. 31. And if interest charges are running, say, $25 a day, the difference between three days' interest and 26 is $400.
There's no real cost savings; you either pay now or you pay later, pointed out David Reed of Partners Mortgage Services in Austin, Texas. "It's more of a cash-flow item than a savings."
Either way, though, since interest is ordinarily collected in arrears, not in advance, your first payment won't be due until December and will include the interest owed for November.
Because cash is an obstacle for many buyers, most lenders will grant a credit at settlement if the closing is held early enough in the month. How early? By the seventh for government-backed mortgages and the 10th for conventional loans.
Lenders don't offer interest credits automatically, said Pat Bell of Community Home Mortgage in Beltsville, Md., so you'll have to ask. If yours agrees, you'll pay a little less than usual at settlement. But your first full payment will be due the following month.
In other words, if you close on, say, Oct. 6, you'll receive a credit of six days' interest. And if interest is $25 a day, that means you'll need $150 less at closing.
But your first payment will be due Nov. 1 instead of Dec. 1. And that should be a concern for anyone who is on a tight budget in which every dollar is critical, said Charles Barger of Trent Financial in Los Angeles.
"If your first payment comes less than 30 days after assuming such extraordinary costs for moving, utility deposits and the like, it could present a serious hardship," Barger said. "You may be better off closing later in the month and postponing that first payment as long as possible."
The date you choose to settle will affect only the amount of interest you pay, not the amount owed for property taxes or hazard insurance.
If you're refinancing a conventional mortgage, the closing date won't matter either. You'll still pay the same amount of interest whether you close on the 8th or the 28th. Only the calculations are different. If you close on the 8th, you'll pay eight days' interest on the old loan, 22 days' interest on the new one. And if you settle on the 28th, you'll pay 28 days' interest on the old loan and two days' interest on the new one.
"One stops and the other starts," said Bell, the Maryland loan officer. "It's pretty cut and dried."
But if you are refinancing a loan insured by the Federal Housing Administration, Bell said, it's in your best interest to pay it off at the end of the month rather than at the beginning of the next month.
Why? Because the FHA allows lenders to collect interest through the end of the month. That's fine for investors, who are guaranteed a full month's interest in any month that an FHA loan is paid off. But it amounts to double jeopardy for borrowers.
Consequently, the later you close out an FHA-insured loan, the better. If you close on, say, the 25th, for example, your old lender can collect only five extra days interest. But if you wait until the third of the following month, the lender can collect 27 extra days of interest.
Either way, you'll pay interest through the end of the month on both the old and new loans. But the later in the month that you close, the less "double interest" you'll have to pay.
The closing date is so critical on FHA refinancings, Barger said, that "we've had people who didn't make it by the end of the month actually postpone settlement until the end of the following month."
Distributed by United Feature Syndicate.