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Does Your Closing Date Make A Difference?
There's a common belief that you can "save" a lot of interest by settling at the end of the month. Is this true? Does it make a difference if you settle at the beginning of the month or at the end?
All mortgage payments are paid in "arrears." This means that any mortgage payment covers the interest owed for the preceding month. It's the opposite of rent payments, which are due in advance.
Since mortgage payments are paid in arrears, your first mortgage payment will always be due at the end of the first full month you took out the loan. Here are two examples:
If you settle in early December, your first full month will be January and your first mortgage payment will be due February 1st -- almost two months after settlement.
If you settle at the end of November, your first full month will be December and your first payment will be due January 1st -- about one month after settlement.
If you settle in the beginning of any month, you will be required to pay the interim interest from the day you settle to the end of the month.
If you settle of the tenth of the month, you would pre-pay roughly 20 days of interest to cover the period from the tenth to the end of the month.
If you settle on the 30th, you wouldn't pre-pay any interest but your first mortgage payment would be due in one month's time.
So, settling at the end of the month doesn't "save" you money. However, if you are short of cash, it will reduce the amount of funds required at the settlement table.
Special FHA Concerns
While we're on the subject of when to close, let's also talk a little bit about loan payoffs.
Millions of Americans are taking advantage of lower interest rates and refinancing their mortgage. For those folks who have Federal Housing Administration loans, it's important to know that FHA collects the entire month's interest when the loan is paid off.
Basically, this means that if you pay off your FHA loan on the first of the month, FHA will charge interest for the entire month. So for folks who are refinancing their FHA loan, it's best to settle at the end of the month.
Your broker or loan officer can answer specific closing questions. In all cases, after you settle keep your closing documents in a safe place -- you'll want them when you sell or refinance and also for tax and estate purposes.
Written by Henry Savage
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