Deanna Valeo
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What is better to close at the beginning of the Month or the end of the Month?

 

"A wise man will make more opportunities that he finds" ~ Francis Bacon

Recently I was asked, "when in the month should I close my loan?"  I would have to say closing at the beginning of the month is the best if at all possible with the following exceptions:  
  • - You currently do not pay a monthly housing payment (rent or mortgage payment)
  • - You are refinancing or selling a home with a FHA mortgage
  • - You have very little in liquid reserves – your lender will guide you in this case
To fully understand this let’s look at an example living in your home for the first three months:

You are getting a new home with a $200,000 loan at 4.875% 30-yr fixed mortgage and the monthly taxes and insurance are $500 a month. Also you are currently renting an apartment for $1000/month. If I close at the beginning of the month (let say a 30 day month - April) I will have 30 days of prepaid interest and no rent due. This is calculated at $200,000 * 4.875% / 360 * 30 = $812.50 in pre-paid interest (a closing cost). 

BTW: the banking world used 360 vs. 365 days for the year – I am not sure why however since it makes the daily interest charge higher – I feel it is a self fulfilling explanation.

In our example your new monthly mortgage payment with principle, interest, taxes and insurance (PITI) is $1,558.42 per month. Based upon closing at the beginning of the month my first new house payment will be in two full months June 1st. So for $812.50 I can live in my home for two full months. On June 1st I would pay $1,558.42 for a total of $2,370.92.

If I close at the end of the month April, 30th (or take interest credit) my closing costs are lower, in our example the prepaid interest is only $27.08 (1-day); however, my first payment is still due June 1st.  I would still have to pay for my rent for the full month of April $1000, and then make my first payment June 1st: $1000 + 27.08 + $1,558.42 = $2,585.50 during the three month period.

In our example we saved $214.58 over a three month period in cash flow; by closing at the beginning of the month.

Why not FHA?

FHA rules are that you must pay the entire months of interest when you pay off a FHA loan. So if you are purchasing with a FHA loan the example still works (usually better to close at the beginning of the month). If on the other hand you are refinancing a FHA loan or buying a new home and paying off a FHA loan then you may be better served waiting until the end of the month. Your mortgage professional can calculate the best course of action for you if you ask.
 
Summary
  • - If your rent is higher than one month’s interest only payment on your new loan: close at the beginning of the month.
     
  • - If you are refinancing or selling a home that currently has a FHA loan; close at the end of the month. 
Follow these rules and you could save yourself some cash.

 
Have a Fantastic Week and Remember We Are Here For You.

Sincerely,


The Valeo-Croy Team - Call today:  (704) 488-1421
Todd Croy - NMLO license #91428
Deanna Valeo - NMLO license #91421
Accessible | Program Expertise | On-Time Closings   
 

In line with the new government restrictions on rate quotes** we will be providing a link to http://www.mortgagenewsdaily.com/mortgage_rates/ and their rate guide.

**Please note the rates quoted are at the absolute best loan amount, the highest credit score and lowest LTVs allowed with a 1% origination fee and indicate the absolute lowest rate possible. You should use this list as a guideline and trend indicator and get a specific quote for your project (often it may be slightly higher).

 

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