Benefits of Closing at the End of the Month: When is Your First Mortgage Payment Due?
Buying a home is often one of the largest financial commitments that you will make, not only in terms of the dollar amount but also the time it will take to pay it off. Car loans are usually designed to last about five years while mortgages are usually set for 30 years.
With such a large investment of time and money, it makes sense to take advantage of any techniques that can help reduce the upfront costs to own a home. One way to help cut down those costs is to choose a closing date later in the month. This is because interest starts accruing on the day you close and doesn’t end until the loan is paid off. During the first month you will have to pay the accrued interest from your closing date until the end of that month.
To be clear, you’re not really saving in the long run. You’re going to end up paying the same amount. It is up to you whether you want to pay those costs at the beginning or at the end. If you are buying a home in a neighborhood requiring monthly HOA fees, paying at the end of the month may also reduce the initial upfront cost as they are usually prorated.
In this post, we’ll talk about the pros and cons of closing at the end of the month.
Benefits of closing at the end of the month
One of the biggest benefits of closing at the end of the month is the amount you would save in interest costs.
To help illustrate this let’s look at the following example:
Mortgage amount: $300,000
Interest rate: 5%
Daily interest accrued: ($300,000 x 5%) 1/365 = $41.10 per day
Closing on June 15, you would prepay 15 days of interest (15 x $41.10 = $616.50)
Closing on June 29, you would prepay 2 days of interest (2 x $41.10 = $82.20)
In this situation, you would save $534.30 on the front end during closing by changing the date. Keep in mind that closing at the end of the month in order to “save” is more of a cash flow preference than true savings.
Using the same example from above with a $300 monthly HOA fee:
HOA fee per day: ($300/30) = $10 per day
Closing on June 15, you would pay $150 ($10 x 15 = $150)
Closing on June 29, you would pay $20 ($10 x 2 = $20)
Closing at the end of the month may also be a huge benefit if you’re leaving a rental property as it may help you avoid paying both a mortgage payment and rent at the same time. This has to do with how mortgage payments are made.
When is your first mortgage payment due?
Mortgage payments are paid in arrears. This means that you are making payments for the past, not in advance like you do when paying rent. With a mortgage, January’s payment is due in February, February’s payment is due in March and so on. Continuing with our June example by closing at the end of the month your first payment would not be due until August.
If your financial situation changes, and you’re going to be late on your payment or miss one altogether, you should contact your lender immediately. If you’re just a few days late on the payment, you may be OK as most lending companies have a grace period (usually two weeks). Going beyond the grace period may result in late fees and could hurt your credit. Missing too many payments could put the loan into default, causing you to lose the home.
The bottom line
Closing at the end of the month may be an attractive option to save money on the front end but you will need to ensure that it is the best option for you. For most people, it is ideal to relocate from one place to another without needing to live in a hotel in between moves, so your closing date should factor in the cost of storage and lodging if you have to move out of your current home to wait for the closing date at the end of the month. No matter the situation, remember that you have the power to negotiate things in your favor. It doesn’t hurt to ask about certain discounts, fees and a closing date that fits best with you.