When you apply for a mortgage loan, the loan officer estimates a closing date. You have a say in the final closing date for the loan — you just have to ensure that it's also convenient for the seller and your real estate agent. Consider what is the best time of the month to close on a mortgage before you set a date with your lender.
Prepaid Interest Charges
Before you figure out when is the best time to close on your mortgage loan, it's best to gain an understanding of what happens at closing. The closing costs the lender charges you includes prepaid interest charges. The lender prorates the interest cost for the number of days after closing that you spend in the home. So for instance, if your loan balance is $100,000 at a yearly interest rate of 7.25 percent, the daily interest cost is $19.86 (.0725 times 100,000 divided by 365 days in a year). So if you close 15 days before the end of the month your prepaid interest charge required at closing is $297.90 (15 times $19.86). Just as if you were renting, don't expect any free days in your new home.
End of the Month
Since you're required to pay prepaid interest for each day of the remainder of the closing month, the best time of month to close when buying a new home is toward the end of the month. The closer to the end of the month you close, the less you have to pay in prepaid interest. However, make sure the closing is before the month ends — if you wait until the first you could end up having to pay 30 or 31 full days of prepaid interest.
When Refinancing to a Lower Rate
Note that the best day to close is different and a bit more complicated when you refinance the mortgage. Firstly, understand that after you refinance a loan it officially begins when the old bank receives the funds in hand to pay off your old loan. The process can take a week or more after closing to finally begin. Secondly, if you're refinancing to a lower cost interest rate, the sooner in the month you start the new loan the better. The sooner you start the new loan, the fewer days you have to pay the higher interest cost. The best day to close when refinancing is early in the month.
When Is the First Full Payment Due?
It's also helpful to understand when you'll have to pay your first payment when you close on a mortgage loan. In most cases, a mortgage payment is due on the first of the month. The lender skips one month after the closing month and then the first payment is due. This at least allows you a short break before having to resume payments after the long and expensive process of closing your mortgage loan.