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,
however, it is a good idea not to close on a Friday.
Closing Date and Per Diem Interest
The interest clock on a mortgage loan starts
ticking on the date when funds are disbursed, which typically is the
closing date on a purchase transaction, and 3 business days after the
closing on a refinance. (Fund disbursement on a refinance occurs after
the required 3-day period during which the borrower can rescind the
transaction). Mortgage interest payments cover an entire month, except
for the very first and the very last payments which cover an odd number
of days. Note: The above does not apply to simple interest mortgages and
HELOCs, which accrue interest daily throughout their lives
Here is an example: Interest for month 1 is $600, or $20 a day. If the
loan funds are disbursed April 25, the borrower will pay $20x5 = $100 at
closing to cover interest for the remaining 5 days in April. This is
called “Per Diem Interest” on the closing statement. On June 1, he will
pay $500 covering interest for the month of May. If he repays the
balance in full on December 5, his final interest payment will cover the
5 days in December.
"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?"
While borrowers on purchase
transactions pay interest beginning the closing date, they may pay it in
different ways, depending on when during the month they close. If you
close on July 29, for example, you pay interest at closing covering July
30 and July 31. Your first monthly payment due September 1 pays the
interest for the full month of August.
If you close the first week of August, say August 3, you may have a choice. You can pay interest at closing for 29 days, with the first regular payment due October 1. The cash required at closing would be higher than if you closed in late July, but the first payment would be pushed out almost a month.
Alternatively, you can close August 3 and receive an interest credit at closing for 3 days, with the first monthly payment due September 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 September 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 select the closing date as close as possible to the moving date, regardless of the day of the month that is.
refinancing should work in the same way as a purchase. If your refinance
is funded 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.
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?”
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.