Most people schedule real estate settlements late in the month to save on paying upfront cash, but the last-minute rush often causes mistakes and creates logjams.
To milk all they can out of their final rent checks, first-time buyers often try to schedule their closings as close to the end of the month as possible.
But there's another reason practically all buyers, not just rookies, prefer to settle up late in the month -- interest. The later you close, the less interest that's owed to the lender. And that means less cash you'll need to bring to the table.
Mortgage interest is collected in arrears. Consequently, if the loan begins on the first of the month after the closing date, borrowers are required to pay at closing all the interest due from the settlement date until the end of the month. The fewer days left in the month, the less upfront interest that's due at settlement.
That's why perhaps 95% of all real estate closings take place during the last week in the month, many on the last day. After all, cash is a big consideration for most people.
But if a few hundred dollars extra won't put a dent in your budget, there are several good reasons to consider closing earlier. One is that fewer mistakes are made when closing agents aren't rushed because they are trying to accommodate everyone they can. Another is that you'll get better service. And it's not just escrow companies that are under the gun at the end of the month. It's everyone down the line -- appraisers, surveyors, insurance agents, even lenders.
Of course, in today's market no one is particularly overrun with business, even as a month draws to an end. But staffs aren't what they were during the boom times, either. So there are fewer professionals left to handle what little activity there is. Thus, the result is often the same -- logjams.
Still, if cash is in short supply, closing as late in the month as you can makes economic sense. Just be ready for the rush to get you in and out the door.
At the same time, though, realize that the later you close, the sooner your first full mortgage payment will be due. Here's how it works: Say you close on Jan. 28. You'll have to pay three days of interest -- Jan. 29, 30 and 31 -- that ordinarily would be due with your February payment. It's called "odd days interest" or "prepaid interest." If you choose to close on Jan. 15, however, you'll owe 16 days of prepaid interest -- from Jan. 16 through Jan. 31. And if interest charges are running, say $25 a day for simplicity purposes, the difference between three days of interest and 16 is $325.
There's no real cost savings, of course. You either pay now or you pay later, so it's more of a cash-flow item than a true savings. Either way, though, your first payment won't be due until March. And because interest is collected in arrears, your March payment will include the interest owed for February.
Because cash is an obstacle for many buyers, most lenders will grant a credit if the closing is early enough in the month. How early depends on the loan.
If the mortgage is insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, you can usually receive a credit if you close by the 7th of the month. If yours is a conventional mortgage, a credit is typically available if you settle by the 10th.
But lenders don't offer interest credit automatically, so you'll have to ask. And if the lender agrees, you'll pay a little less than you otherwise would at closing. But your first full payment will be due the following month instead of the month after that.
In other words, if you close on Jan. 6, you'll receive a credit of six days' interest. If interest is $25 a day, that means you'll need $150 less at closing than you ordinarily would. But your first payment on the loan will be due Feb. 1 instead of March 1. And that could be problem if you are on a tight budget.
A full payment so soon after ponying up thousands of dollars at closing, not to mention covering moving costs and utility company deposits, could present such a serious hardship that closing later in the month -- and postponing that first payment for as long as possible -- may be a better course of action.
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