(TNS)—Does is matter which day of the month your mortgage closes?
In general, on a purchase transaction it doesn’t, but it may on a refinance.
On a purchase transaction, you should select the closing date as close as possible to your moving date, regardless of the day of the month that is. There is no financial advantage in closing on any day of the month, as compared to any other day.
The interest clock on your loan starts ticking on the closing date, because the lender expects to be paid beginning the day the funds are disbursed. There is no point in paying interest before you are prepared to move.
The first payment on a home loan is always due on the first day of a month, and always includes interest for a full month. Since loans may close anytime within the month, there is always an interest adjustment at closing based on the exact closing date. This is called “per diem interest”.
If you close on July 29, for example, you pay interest at closing covering July 30, 31 and Aug. 1. Your first monthly payment is due Sept. 1. So at closing you pay interest for the last 3 days of July, and the first monthly payment due on Sept. 1 pays the interest for the full month of August.
If you close the first week of July say July 3, the lender may give you a choice. You can pay interest at closing for 29 days, with the first regular payment due Sept. 1. The cash required at closing would be higher than if you closed in late September, but the first payment would be pushed out almost a month.
Alternatively, you can close July 3 and receive an interest credit at closing for three days, with the first monthly payment due Aug. 1. The cash required at closing would be lower in this case. But you would pay a full months interest on Aug. 1, even though you did not have the loan for a full month.
Bottom line, on a purchase transaction, there is no financial advantage in closing on any one day of the month compared to any other, so set the closing for the day you want access to the house.
In principle, refinancing should work in the same way as a purchase. If you close a refinance on the 3rd of the month, for example, you should pay per diem interest for three days to the old lender, and for 28 days to the new lender. Unfortunately, because of glitches in the system, it doesn’t work out that way. Borrowers often are charged interest by both lenders for one day, and sometimes two or three.
The major reason seems to be that the funds don’t move directly from the new lender to the old lender. They are held by an intermediary until the new documents have been recorded, and that process takes time. Because recording offices are usually closed on the weekend, borrowers who close on a Friday are especially likely to pay double interest for several days. So don’t close on a Friday if you can avoid it.
In addition, since its inception, FHA has required that interest be paid for a full month on refinanced loans, regardless of when during the month the refinanced loan is paid off. Those refinancing out of an FHA, therefore, had an incentive to try to close as near to the end of the month as possible. However, this crazy rule is finally being changed and will not apply to loans closed after Jan. 21, 2015.
Is Seller Financing a Way to Buy Cheap?
“The seller of a house in which we are interested is offering it at a good price, taking back a 70 percent mortgage if we put down 30 percent. Are there any special risks in such a deal?”
Many. The seller offering to finance a sale is probably unable to sell in any other way. Perhaps she does not have good title, or there may be a lien on the house that she cannot repay.
I would run like a thief if offered such a deal, because legal complications are the last thing I want when buying a house. However, if you are determined to pursue it, retain a real estate lawyer as your first step, recognizing that it may also be your last step.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
©2014 Jack Guttentag
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