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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 refinancing to a lower rate - near the start of the month

When refinancing to a higher rate - near the end of the month

When buying a home - near the end 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 if you getting a lower interest rate.

It is all about the prepaid interest that you have to pay at the closing.

Here's how it works. When you close a loan, whether refinancing or buying 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 of 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.

Refinancing Example
I have included two examples for refinancing. One for when you have refinanced at a lower interest rate and one for when you have refinanced at a higher rate.

Why would you refinance to a higher rate, you ask?
This is mainly for times when rates are rising (as in 2005 and 2006) and you have an ARM that is going to begin to adjust and you are switching to a fixed rate.

Refinancing at a lower rate
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

Look at that, this borrower was working with a mortgage professional who actually had the borrowers best interests up front and this borrower saved $48 of interest!!

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

Refinancing at a Higher Interest Rate
If you are in the situation where you took an ARM for a lower rate with all the intentions of having a new home by the time the ARM would begin to adjust but something has changed where you now need a new mortgage and rates are now higher than you are currently paying, this is the section for you!

In your situation, the prepaid interest on the new mortgage will be more per day than you are paying now, therefore you will want the refinance to close as close to the end of the month as possible and to have the least number of days of prepaid interest on the new mortgage as possible.

You want your loan to FUND on the last day of the month if you can!!
NOTE: Due to the 3 day recission period (where you get 3 days to change your mind) you actually want to close your loan on the 4th business day before the end of the month!!

NOTE: Since buyers often want to close at the end of the month too, work this out with your mortgage professional and schedule this closing a week to 10 days in advance in order to secure a closing time at the title company or attorney's office as the appointment slots at the end of the month fill up quickly.

Example:
Your Loan Amount is $150,000
Current Interest Rate is 5%
New Interest Rate will be 6%

You currently are paying $20.55 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 $20.55	$328.80
15 days at $24.66	$369.90
Total prepaid interest at closing	$698.70

Here is a refinancing example of closing on the 25th of the month

6 days at $24.66	$147.96
25 days at $20.55	$513.75
Total prepaid interest at closing	$661.61

This borrower worked with a mortgage professional who actually had the borrowers best interests at heart and saved $38 of unnecessary interest.

Summary
I hope this has helped you to save money on your refinance!

There are certainly enough costs associated with a refinance to not be paying any additional days of interest that you do not have to!

This is only one of the many ways that I will save you money as your lender for life. Please give me a call if I can assist you in any other way or give you additional advice on your personal mortgage or financing situation.

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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