After you have determined how much house you can afford and started the loan process, you will eventually be given a close date. When you close on your mortgage, you must pay accrued interest from the date you close through the end of that month. The nearer to the last day of the month you close, the less interest you owe at closing for that month.
In other words, if you close on April 29, your closing costs include accrued interest for April 29 and 30. If you close earlier in the month--for example, on the 15th of April--you owe interest from the date that you close to the last day of that month. In the second example, you would owe accrued interest from the 15th through the 30th.
You can see just how much less you'll pay upfront by closing later in the month. Using the April scenarios above as examples for a $200,000 mortgage at 5.00 percent interest, you would realize the following up-front savings:
- Mortgage amount: $200,000
- Interest rate: 5%
- Daily interest accrued: ($200,000 x 5%) 1/365 = $27.40 per day
- Closing on April 15, you would prepay 15 days of interest (15 x $27.40 = $411.00)
- Closing on April 29, you would prepay 2 days of interest (2 x $27.40 = $54.80)
Your out-of-pocket savings at closing in this example would be $356.20. Depending on the day of the month you close, you could save a substantial amount of up-front costs by scheduling your closing date as near to the end of the month as possible.
Skipping Your First Mortgage Payment
Unlike rent, which is paid one month in advance, your mortgage payment is made in arrears. After closing, your first mortgage payment comes due one full month after the last day of the month in which your mortgage closed. Using the April example again, if you close April 15 or April 29, your first mortgage payment is due on June 1.
What if you expect to close on April 29, but the date gets pushed back to May 5 for some unforeseen reason? Your interest would accrue from May 5 until May 30 (25 x $27.40 = $685)--quite a substantial increase in what you expected to pay at closing.
Changes to the closing date can account for significant fluctuations in the closing costs from those set forth in your Good Faith Estimate (GFE). Your overall interest for the term of your loan, however, does not change. You benefit only in the short term by avoiding a larger outlay of money at a time when you might need it for other expenses, for example, moving or purchasing items for a new home.
Pushing the closing date forward to earlier in the following month moves the due date of your first mortgage payment ahead another month. In the previous example moving the closing to May 5, you would not need to make your first mortgage payment until July 1.
When you are financing a primary residence, HUD 4155.2 6.A.1.d, Per Diem Interest and Interest Credits at Closing states that if your closing date is pushed forward for unforeseen circumstances, "the lender may credit up to seven calendar days of per diem interest to the borrower and have the mortgage payments begin the first day of the succeeding month."
Closing earlier in the month also avoids the lender's and settlement agent's busiest few days. You may benefit from their having more opportunity to devote extra attention to you at a time when you may appreciate the additional support.
When you close on your mortgage, you must pay accrued interest from the date you close through the end of that month. The nearer to the last day of the month you close, the less interest you owe at closing for that month.