Better to Close at Start of Month or End of Month

The common conception is the end of the month. While that is typically true, it is not as true as most people think. Here is the scoop -

People say close at the end of the month so that you can avoid prepaid interest. The general thought is that you are somehow saving interest. While this is technically true (closing at the end of the month will require little to no prepaid interest to be collected), interest is charged to you every day. Whether it is charged by the old lender being paid off, or the new lender, there are no free days. So while closing at the end of the month means less prepaid interest on the new loan, it also means more interest included in the payoff to the old lender. Typically you are refinancing to get a lower interest rate, if that is the case, the longer you wait the more interest you pay at the higher rate. In that case, closing earlier could be beneficial if there is room in the loan for the additional interest. Either way, the difference in interest on a daily basis is likely to be small enough that it doesn't have a dramatic change either way.

Other reasons for closing earlier/later - in a refinance closing earlier in the month (before you have made that months payment) can sometimes allow you to go 2 months without a house payment. While this money is basically being rolled into the loan (remember no free days), it can help your immediate cashflow.

One reason to close earlier is if you have an existing FHA loan and are refinancing. FHA loans quote interest through the end of the current calendar month, so even if you close on the 1st, your old loan payoff will have interest included through the last day of that month.

Lastly, in the case of a purchase loan, closings are typically held at the end of the month. This is because there is no old loan to payoff, at least not a loan in your name, so you are truly saving days of interest at that point. The flip side is that if you can close earlier in the month, 1.) You will get possession of the home sooner, and 2.) You may be able to get close to 60 days in the home before you house payment is due.

In the end there are arguments for both sides, but there is no free lunch either way.

AC

Great answer AC... 5 stars for you!

Kent Mikkola:

Great answer AC... 5 stars for you!

Sweeeeeeeet!

For clients who are short of cash for closing costs, the additional wages by the end of the month could be helpful?

Antonio answered that well, but one bit to add . . .

If you are trying to rush something, or your loan requires closing at a particular time of day, etc . . . the beginning or middle of the month can be a great time to close. Underwriters, Loan Officers, Attorneys and Title Agents are often less busy . . . you will get more personal attention and better scheduling options during "non peak" periods.