Mortgage Closing Date: Does it Matter?
September 19, 2001, Revised December 17, 2003, August 2, 2004,
April 1, 2008
On a purchase transaction, there is no financial advantage in closing on any day of the month, as compared to any other day. On a refinance, it is a good idea not to close on a Friday because it will increase the number of days in which you pay interest on both loans. And if you are refinancing out of an FHA, close at the end of the month because you will pay interest on the FHA for the entire month, regardless of when you close.
"We purchased a home that should be completed in late July. A friend said that it would it be advantageous to close in early August as opposed to July 29. Is that correct?"
On a purchase transaction, there is no financial advantage in closing on any day of the month, as compared to any other day.
The interest clock on your loan starts ticking on the closing date, because the lender expects to be paid beginning the day the funds are disbursed. There is no point in paying interest before you are prepared to move. You should select the closing date as close as possible to the moving date, regardless of the day of the month that is.
While borrowers pay interest beginning the closing date, they may pay it in different ways, depending on when during the month they close. The first payment on a home loan is always due on the first day of a month, and always includes interest for a full month. Since loans may close anytime within the month, there is always an interest adjustment at closing based on the exact closing date. This is called "per diem interest".
If you close on July 29, for example, you pay interest at closing covering July 30, 31 and August 1. Your first monthly payment is due September 1. So at closing you pay interest for the last 3 days of July, and the first monthly payment on September 1 pays the interest for the full month of August.
If you close the first week of July say July 3, you may have a choice. You can pay interest at closing for 29 days, with the first regular payment due September 1. The cash required at closing would be higher than if you closed in late September, but the first payment would be pushed out almost a month.
Alternatively, you can close July 3 and receive an interest credit at closing for 3 days, with the first monthly payment due August 1. The cash required at closing would be lower in this case, which is probably what your friend had in mind. But you would pay a full months interest on August 1, even though you did not have the loan for a full month.
Bottom line, there is no financial advantage in closing on any one day of the month compared to any other, so set the closing for the day you want access to the house.
In principle, refinancing should work in the same way as a purchase. If you close a refinance on the 3rd of the month, for example, you should pay per diem interest for 3 days to the old lender, and for 28 days to the new lender. Unfortunately, because of glitches in the system, it doesn't work out that way. Borrowers often are charged interest by both lenders for 1 day, and sometimes 2 or 3.
The major reason seems to be that the funds don't move directly from the new lender to the old lender. They are held by an intermediary until the new documents have been recorded, and that process takes time. Because recording offices are usually closed on the weekend, borrowers who close on a Friday are especially likely to pay double interest for several days. So don't close on a Friday if you can avoid it.
Furthermore, FHA requires that interest be paid for a full month, regardless of when a loan is closed during the month. Those refinancing out of an FHA, therefore, should try to close as near to the end of the month as possible.
“If I close on May 1, why does the lender allow me to go until July 1 before making the first payment? What does the lender get out of it?”
I imagine it is done to generate good will. However, your unstated premise that the gesture costs the lender is unfounded.
If you close on May 1 and your first payment is due July 1, there are two possibilities. The first is that you pay interest for the month of May at closing, and you pay interest for June on July 1. In this situation, the lender collects all the interest that is due and has given away nothing.
The second possibility is that you do not pay interest for the month of May at closing but your first payment remains due on July 1. In that event, the lender is adding the interest for May to your loan balance, so you will be paying interest on it for as long as you have the loan. The lender is giving away nothing here, either.
Lenders are not known for bestowing gifts on borrowers at closing.
On a purchase transaction, there is no financial advantage in closing on any day of the month, as compared to any other day. On a refinance, it is a good idea not to close on a Friday because it will increase the number of days in which you pay interest on both loans. And if you are refinancing out of an FHA, close at the end of the month because you will pay interest on the FHA for the entire month, regardless of when you close.
Closing Dates on a Purchase Transaction
"We purchased a home that should be completed in late July. A friend said that it would it be advantageous to close in early August as opposed to July 29. Is that correct?"
On a purchase transaction, there is no financial advantage in closing on any day of the month, as compared to any other day.
The interest clock on your loan starts ticking on the closing date, because the lender expects to be paid beginning the day the funds are disbursed. There is no point in paying interest before you are prepared to move. You should select the closing date as close as possible to the moving date, regardless of the day of the month that is.
While borrowers pay interest beginning the closing date, they may pay it in different ways, depending on when during the month they close. The first payment on a home loan is always due on the first day of a month, and always includes interest for a full month. Since loans may close anytime within the month, there is always an interest adjustment at closing based on the exact closing date. This is called "per diem interest".
If you close on July 29, for example, you pay interest at closing covering July 30, 31 and August 1. Your first monthly payment is due September 1. So at closing you pay interest for the last 3 days of July, and the first monthly payment on September 1 pays the interest for the full month of August.
If you close the first week of July say July 3, you may have a choice. You can pay interest at closing for 29 days, with the first regular payment due September 1. The cash required at closing would be higher than if you closed in late September, but the first payment would be pushed out almost a month.
Alternatively, you can close July 3 and receive an interest credit at closing for 3 days, with the first monthly payment due August 1. The cash required at closing would be lower in this case, which is probably what your friend had in mind. But you would pay a full months interest on August 1, even though you did not have the loan for a full month.
Bottom line, there is no financial advantage in closing on any one day of the month compared to any other, so set the closing for the day you want access to the house.
Closing Dates on a Refinance
In principle, refinancing should work in the same way as a purchase. If you close a refinance on the 3rd of the month, for example, you should pay per diem interest for 3 days to the old lender, and for 28 days to the new lender. Unfortunately, because of glitches in the system, it doesn't work out that way. Borrowers often are charged interest by both lenders for 1 day, and sometimes 2 or 3.
The major reason seems to be that the funds don't move directly from the new lender to the old lender. They are held by an intermediary until the new documents have been recorded, and that process takes time. Because recording offices are usually closed on the weekend, borrowers who close on a Friday are especially likely to pay double interest for several days. So don't close on a Friday if you can avoid it.
Furthermore, FHA requires that interest be paid for a full month, regardless of when a loan is closed during the month. Those refinancing out of an FHA, therefore, should try to close as near to the end of the month as possible.
There Are No Free Lunches on Closing Dates
“If I close on May 1, why does the lender allow me to go until July 1 before making the first payment? What does the lender get out of it?”
I imagine it is done to generate good will. However, your unstated premise that the gesture costs the lender is unfounded.
If you close on May 1 and your first payment is due July 1, there are two possibilities. The first is that you pay interest for the month of May at closing, and you pay interest for June on July 1. In this situation, the lender collects all the interest that is due and has given away nothing.
The second possibility is that you do not pay interest for the month of May at closing but your first payment remains due on July 1. In that event, the lender is adding the interest for May to your loan balance, so you will be paying interest on it for as long as you have the loan. The lender is giving away nothing here, either.
Lenders are not known for bestowing gifts on borrowers at closing.