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When is the best time of month to close?
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The answer depends on whether you are refinancing or buying a home
- When buying a home
- near the end of the month
- When refinancing
- near the start of the month
Many borrowers are under the impression that it is best to close at the
end of the month because there will be less prepaid interest to pay. While
this is the correct decision when you are buying a home, when you are refinancing
in order to get a lower interest rate, that is not the right assumption
to make.
Here's how it works. It is all about the prepaid interest that you have
to pay at the closing. When you close a loan, whether buying or refinancing
a home, you will pay prepaid interest amounting to the number of days remaining
in the month to your new mortgage company.
When refinancing, you will also pay interest to the old mortgage
company for every day in the month that you still have the old loan for
a total of 30 (or 31, or 28 of course!) days if interest.
Therefore, in order to have the lowest closing costs when you buy a home,
you would just want to have the least number of days of interest to pay.
This is as close as possible to the end of the month. (This is also why
closings at the end of the month are under great demand and you will need
to plan ahead and be flexible to get a closing time)
In order to have the lowest closing costs for a refinance you will want
to have the least number of days of interest at the higher rate and therefore
closer to the start of the month.
Here are example of both situations.
Purchasing
Example
When you buy a home, the loan begins the day that you close.
For instance:
Your Loan Amount is $150,000
Interest Rate will be 6%
You will be paying $24.66 per day in interest
At $24.66 a day, a closing on the 1st of the month vs the 30th of the month
would add 29 days of interest or $715.14 to the bottom line for cash you
need to have at closing.
Note that unless you have the clear to close and a closing time scheduled
at least 10 days before the closing from the mortgage lender, this could
be a problem that just might cause you to pay an extra month of rent from
trying to time it too closely,
Be careful of trying to squeeze out every dollar of savings, that can come
back to haunt you.
Refinancing
Example
A 1% drop in the interest rate is a savings of approximately $4 per day
on a $150,000 loan.
Note that when you refinance, you will actually start paying interest on
the day the loan funds, not the day of closing and you will also pay interest
to the old bank until they receive the funds that are overnighted to pay
off the loan.
If you close on a Monday, the loan will fund on Friday (after the 3 day
right of recission) and many banks will not process the funds until the
next Monday, actually costing you additional days of interest. Be careful
of Monday closings.
For instance:
Your Loan Amount is $150,000
Current Interest Rate is 7%
New Interest Rate will be 6%
You currently are paying $28.77 per day in interest
You will be paying $24.66 per day in interest
This is more than $4 per day. The day you close could save you up to 4x30
or $120 and you want to pay the least number of days possible at the highest
rate per day.
Here is an example of a loan that funds on the 15th of the month
| 16 days at $28.77 |
$460.32 |
| 15 days at $24.66 |
$369.90 |
| Total prepaid
interest at closing |
$830.22 |
Here is a refinancing
example of closing on the 5th of the month
| 6 days at $28.77 |
$176.22 |
| 25 days at $24.66 |
$616.50 |
| Total prepaid
interest at closing |
$782.72 |
Summary
The whole idea of refinancing is to save money, so why not get started the
first month?
Still not sure about the timing? Please give me a call or use the online
chat!
And, of course, send your business my way. If the person you are considering
working with hasn't told you these basic things...what else aren't they
telling you?
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