When is the Best Time of Month to Close your Mortgage?

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When is the best time of month to close?

The answer depends on whether you are refinancing or buying a home

When buying a home - near the end of the month
When refinancing - near the start of the month

Many borrowers are under the impression that it is best to close at the end of the month because there will be less prepaid interest to pay. While this is the correct decision when you are buying a home, when you are refinancing in order to get a lower interest rate, that is not the right assumption to make.

Here's how it works. It is all about the prepaid interest that you have to pay at the closing. When you close a loan, whether buying or refinancing a home, you will pay prepaid interest amounting to the number of days remaining in the month to your new mortgage company.

When refinancing, you will also pay interest to the old mortgage company for every day in the month that you still have the old loan for a total of 30 (or 31, or 28 of course!) days if interest.

Therefore, in order to have the lowest closing costs when you buy a home, you would just want to have the least number of days of interest to pay. This is as close as possible to the end of the month. (This is also why closings at the end of the month are under great demand and you will need to plan ahead and be flexible to get a closing time)

In order to have the lowest closing costs for a refinance you will want to have the least number of days of interest at the higher rate and therefore closer to the start of the month.

Here are example of both situations.

Purchasing Example
When you buy a home, the loan begins the day that you close.

For instance:
Your Loan Amount is $150,000
Interest Rate will be 6%
You will be paying $24.66 per day in interest

At $24.66 a day, a closing on the 1st of the month vs the 30th of the month would add 29 days of interest or $715.14 to the bottom line for cash you need to have at closing.

Note that unless you have the clear to close and a closing time scheduled at least 10 days before the closing from the mortgage lender, this could be a problem that just might cause you to pay an extra month of rent from trying to time it too closely,

Be careful of trying to squeeze out every dollar of savings, that can come back to haunt you.

Refinancing Example
A 1% drop in the interest rate is a savings of approximately $4 per day on a $150,000 loan.
Note that when you refinance, you will actually start paying interest on the day the loan funds, not the day of closing and you will also pay interest to the old bank until they receive the funds that are overnighted to pay off the loan.

If you close on a Monday, the loan will fund on Friday (after the 3 day right of recission) and many banks will not process the funds until the next Monday, actually costing you additional days of interest. Be careful of Monday closings.

For instance:
Your Loan Amount is $150,000
Current Interest Rate is 7%
New Interest Rate will be 6%

You currently are paying $28.77 per day in interest
You will be paying $24.66 per day in interest

This is more than $4 per day. The day you close could save you up to 4x30 or $120 and you want to pay the least number of days possible at the highest rate per day.

Here is an example of a loan that funds on the 15th of the month

16 days at $28.77	$460.32
15 days at $24.66	$369.90
Total prepaid interest at closing	$830.22

Here is a refinancing example of closing on the 5th of the month

6 days at $28.77	$176.22
25 days at $24.66	$616.50
Total prepaid interest at closing	$782.72

Summary
The whole idea of refinancing is to save money, so why not get started the first month?

Still not sure about the timing? Please give me a call or use the online chat!

And, of course, send your business my way. If the person you are considering working with hasn't told you these basic things...what else aren't they telling you?

Harry Smith email Harry@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-514-9000	Drew Smith email drew@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-703-7770
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