September 19, 2001,
Revised December 17, 2003, Revised August 2, 2004
"We
purchased a home that should be completed in late July.
A friend said that it would it be advantageous to close in early
August as opposed to July 29. Is
that correct?"
On
a purchase transaction, 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. You should select the closing date as close as
possible to the moving date, regardless of the day of the month that
is.
While
borrowers pay interest beginning the closing date, they may pay it in
different ways, depending on when during the month they close. 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 August 1. Your first monthly payment is due
September 1. So at closing you pay interest for the last 3 days of
July, and the first monthly payment on September 1 pays the interest for
the full month of August.
If
you close the first week of July say
July 3, you may have a choice.
You can pay interest at closing for 29 days, with the first regular
payment due September 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 3 days, with the first monthly payment due August 1.
The cash required at closing would be lower in this case, which is
probably what your friend had in mind.
But you would pay a full months interest on August 1, even
though you did not have the loan for a full month.
Bottom
line, 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 3
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 1 day,
and sometimes 2 or 3.
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.
Furthermore,
FHA requires that interest be paid for a full month, regardless of when a
loan is closed during the month. Those refinancing out of an FHA,
therefore, should try to close as near to the end of the month as
possible.
�If I close on
May 1, why does the lender allow me to go until July 1 before making
the first payment? What does the lender get
out of it?�
I imagine it is done to generate good will. However, your unstated premise
that the gesture costs the lender is unfounded.
If you close on May 1 and your first payment is due July 1,
there
are two possibilities. The first is that you pay
interest for the month of May at closing, and you pay interest for June on
July 1. In this situation, the lender collects all the interest that
is due and has given away nothing.
The second possibility is that you do not pay interest for the month of May
at closing but your first payment remains due on July 1. In that event, the
lender is adding the interest for May to
your loan balance, so
you will be paying interest on it for as long as
you have the loan. The lender is giving away nothing here, either.
Lenders are not known for bestowing gifts on borrowers at closing.
Copyright
Jack Guttentag 2003
