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When it comes to closing on a mortgage, conventional wisdom says the end of the month is the best time to do it. The reason? You’ll pay less in prepaid interest, thereby reducing your upfront closing costs.
But in the overheated housing market of 2021, conventional wisdom doesn’t necessarily hold.
While it’s true you’ll pay less upfront, that’s not the whole story. In fact, closing at the beginning or middle of the month may be just as sensible, according to Vidana and other mortgage experts.
In any case, your lender may be exceptionally busy at the end of the month, anyway. In 2020, home sales hit their highest level since 2006 and record-low mortgage rates drove a surge in mortgage refinancing. The total number of mortgage loans closed in 2020 is expected to be 50% higher than the previous year, according data provided by the Mortgage Bankers Association. And now we’re a few weeks into 2021, and it’s still looking like rates are holding at historic lows.
“Closing at the end of the month isn’t as black and white as sometimes Realtors make it seem,” Vidana says. “The way I look at it is, it depends on what your [financial] goals are.”
For example, the day you close during the month will also determine how much time you have before your first payment on the new mortgage is due. So there could even be an advantage to closing earlier.
There’s no perfect day for you to close. Instead, you should try to understand how the time of the month you choose to close impacts your bottom line. Here’s what you need to know about when to close on your mortgage.
What to Consider When Closing Later in the Month
One of your closing costs is prepaid interest, which is the interest that accrues between the day you close and the beginning of the following month. “If you close on the 25th, you may have six days of interest, whereas if you close on the 5th of the month you may have 26 days of interest,” says Elizabeth Rose, Certified Mortgage Planning Specialist with AmCap Home Loans in Dallas. So closing later in the month means you’ll have fewer days of interest to prepay.
To get an estimate of how much your prepaid interest will be, take your mortgage rate and divide it by 365 to get your daily interest rate. Then multiply that number by your loan balance, which will show you how much prepaid interest you’ll pay per day.
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In this example, closing on the 25th would mean owing roughly $107 to $148 in prepaid interest, whereas closing on the 5th would mean owing approximately $463 to $640.
Saving money on upfront closing costs sounds great, but there’s something else to consider. When you take out a new mortgage, your first payment is due on the first day of the second month after the month you close in. “If you close in February your first payment on the new mortgage isn’t due until April,” Rose says.
Closing later in the month means you’ll have less time before you need to make your first payment on the new mortgage.
What to Consider When Closing Early in the Month
One of the biggest advantages to closing early in the month is the extra time you’ll have before you start paying off the new mortgage. But the extra time you may get from your closing date until your first mortgage payment is somewhat offset by the interest you prepay.
Consider closing in the middle of the month. You’ll pay less prepaid interest than closing at the beginning and your lender shouldn’t be as busy.
If you’re able to take advantage of a first-time homebuyer program to cover some or all of your closing costs, then closing early in the month can save you money. “If you’re getting someone else to pay the prepaid interest for you, then you’re really getting another month free,” Vidana says. In a buyer’s market, you may even be able to get a seller to cover some of your closing costs. However, it’s a seller’s market in most places right now. “Unfortunately, in this market most buyers are paying closing costs,” he says.
If you’re closing earlier in the month, you may also find that the title company and lender aren’t as busy. Because so many people want to close later in the month, “it could get clogged or congested toward the end of month,” Vidana says. While this won’t necessarily cause any delays in the closing process, it’s a consideration, especially if you’re refinancing your existing mortgage.
When you’re taking out a mortgage to purchase a home, there are more definite deadlines to meet. “A purchase transaction will usually take precedence over a refinance in the timeline of getting things done,” Rose says.
Why It May Not Matter When You Close
Ultimately, you need a place to live, regardless of when you move into your new home. So in some cases, it doesn’t make much of a difference when you close. “Wherever you’re living, you’re paying to live there every single day you live there,” Rose says. If you’re selling a house and moving into a new home, “you’re going to pay interest on your old loan up until the day you close and sell, and you’ll pay interest on the new loan from the day you close on your purchase,” she says.
There’s also something to be said for splitting the difference. “Try to go for the middle of the month,” Vidana says. “You are going to have to pay some per-diem interest, but it’s not going to be the entire month and [the lender’s] not so busy.”
What time of the month you close on your mortgage can make a difference to your bottom line. But there are a lot of factors to take into account. So it’s not always clear whether earlier or later is better. “I think it honestly, doesn’t really matter [when you close],” Rose says.
And if you’re looking for opportunities to save the most money, what day you close isn’t as important as your mortgage or refinance rate, the price you buy at, or the other upfront fees you pay for closing costs.