Can You Save Money by Closing a Home Loan at the End of the Month?

In order to understand if you will be able to save money from closing at the end of the month, you have to learn some background information on how the mortgage loan closing costs are determined.  You will want to start by comparing renting or rental payments to a mortgage payment.  When you pay rent, you normally have to pay the bill at the start of each month for the forthcoming month, which is basically paying in advance.  However, with your mortgage payments, the monthly mortgage payment normally pay off the interest that was built up on the principle balance throughout the previous month.  Mortgage payments pay the interest in arrears as opposed to how the rent payment is paying for future use.

When you want to close on your house, you are generally able to do so at any time during the month.  As an example let’s say your closing date is on October 15, which would mean that your first mortgage payment is due on December 1st.  In order to maintain a level of homogeneity in the mortgage securities market most all primary mortgage payments are due on the first of the month. This payment on December 1st would include the interest for November since monthly mortgage payments pay the interest in arrears.  However, what about the 16 days of October that remains between the closing on October 15 when you receive the money or the keys to the new home and November 1?  The amount of interest that would be due for the rest of that month is paid at closing, which is sometimes called pre-paid interest or interim interest.  You will notice that the closer to the latter part of the month you close on your house, the smaller the interim interest payment will be since there are fewer days from  the home loan closing to the beginning of the next month.

If you are currently renting, but intend on purchasing a home, you will probably want to settle for an end-of-the-month closing because you will be able to be moved out of your rental home and into their new house before the next month’s rent is due.

Because of this, many people decide to close at the end of the month.  By closing at the end of the month you wont save money but since the purchase closing requires the down payment, closing costs and the interim interest, it does reduce the cash needed to close significantly.  On a standard purchase transaction this is a real financial outlay, which many homebuyers could desperately do without.  However, if you aren’t concerned with having to pay an interim interest payment, than you will not likely be concerned about which day you close on the new home loan. 

The role of interim interest in a refinance may be very different.  In many cases a homeowner will add the amount of money needed for their refinance based on their home mortgage balance including any type of closing costs and escrows and any interim interest that is involved.  Therefore, many homeowners considering a mortgage refinance assume that if they close at the end of the month the closing costs are lower.  However, the main calculation many borrowers forget is the build-up of interim interest within their old mortgage loan. 

You will find that many borrowers will call their current mortgage lender at the very beginning of the month to find out how much their principle balance is so they can make a payoff.  The borrowers intention is to make the last payment on the old mortgage and keep the interim interest down on the new one.  Many borrowers will find that if they decide to close near the end of the month, their payoff is much higher than the original quote.  This is because of the amount of interest that has accumulated throughout that month on this home loan.

These individuals who are considering a mortgage refinance will not pay that month’s mortgage payment.  An example of this would be if the closing on your mortgage refinance wasn’t until October 15, many borrowers wouldn’t pay their October 1st payment.  They can successfully do this because many mortgage lenders will not count a payment as late till the 15th of each month.  While this is not suggested many individuals still continue to perform their home mortgage refinance in this manner.  However, they will quickly find out that at closing they will have to pay interest not only for September (which was what the October 1st bill was covering) but also interest for half of October. 

If you wait to close at the end of the month it may seem like you are saving money.  Of course, you are doing a mortgage refinancing for a reason.  If that reason is a lower mortgage interest rate or a consolidation to pay off debts at a higher rate, it never pays to wait.  The longer you wait to close the more interest you are accruing on your existing mortgage, since its rate is higher than the new mortgage refinance, you are paying more money each day you wait to refinance.  Better to pay interim interest on the lower mortgage rate of the new home loan than a higher mortgage rate on the home mortgage you are refinancing.

There are some mortgage lenders that will give you something called an “interest credit” when you close for the first five days of a month.  This is a credit of interest during these five days, which will ultimately be included within the upcoming payment.  When there is an interest credit, the first payment will be on the very next month.  An example is if you close on the 2nd of January, instead of 28 days of interim interest and a first payment March 1st, you will get a two day interest credit and the first payment will be due February 1st.

FHA loans actually accumulate interest from the beginning of the month to the end of the month no matter when they were paid off.  Because of this, when you’re paying off an FHA home loan, you will need to properly time the closing so you do not have to pay double interest.   FHA does not calculate the interest daily on an existing mortgage loan.

The bottom line is that the closing date may save money for out of pocket costs versus costs added to the loan amount but the ultimate savings is really only an accounting issue.  The interest for the mortgage loan has to be paid one way or another regardless of when the loan closes.