What is the best day of the month to close on your mortgage? Not everyone will have the same answer to that question, as it depends on your specific mortgage situation.
Many homebuyers consider the end of the month to be the best time to close. Data released by the National Association of Realtors (NAR) in 2014 shows that the last business days of seven different months (February, April, May, June, July, August, and September) were the top seven closing days for that year.
Part of the reason for end-of-month closings may be to coincide with the end of leases on existing rentals or convenient moving dates – but from a financial point of view, what’s the incentive to close at the end of the month? It’s for improved cash flow management on interest payments.
Your first monthly home payment will not be due at the closing date, but you will be charged interest for every day you own the home, including the time between closing and the end of the month. By closing nearer the end of the month, you minimize the number of days that you will be responsible for an upfront interest payment upon closing.
You aren’t really saving an “extra” partial month of interest payments. You’re just altering the timing of paying that interest.
There are equally strong cash flow arguments for closing early in the month. Mortgages are paid on an arrears basis, meaning that you pay after the month is complete. If you close at the end of a month, you don’t make any mortgage or interest payments until the succeeding month has passed. For example, if you close on April 30, you will not make another payment until June 1, when you make both mortgage and interest payments for May.
If you closed on April 1 instead, you would be responsible for the interest for all of April at closing, but your first mortgage payment would still not be due until June 1, to cover May’s principal and interest payments.
It’s possible to improve short-term cash flow further by folding the first month’s interest payment into the loan, and closing at the beginning of the month – thus putting off all interest and mortgage payments for two full months. Of course, you will ultimately pay for this through the increased loan amount and corresponding interest payments.
If you are refinancing instead of buying, the interest incentive switches. Since you already own the house, you are already paying interest throughout the month. Prior to closing, you are paying interest under the old loan terms, and from the closing date forward, you switch to the new terms.
Assuming your refinanced mortgage has a lower interest rate – and it should, or you would have very little incentive to refinance at all – you would prefer that more days in the closing month be paid at the new, lower interest rate. In that case, closing at the beginning of the month is preferable.
Keep in mind that because end-of-the-month closings are relatively popular, lenders and real estate attorneys are in higher demand. You may run into scheduling difficulties – or worse, distractions may leave your agent and/or attorney unable to give your closing the attention it deserves.
While you can save money by timing your closing properly, that one-time savings can be wiped out by not paying attention to the basic fees and costs associated with closing – especially if any of the closing costs are subject to negotiation.
Your lender should supply you with a closing checklist. Review that checklist to make sure you are fully prepared – and then once you have everything in order, schedule your closing to optimize your savings and cash flow.
MoneyTips is happy to help you get free refinance quotes from top lenders.