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 the best time of the month to close on a house before you set a date to finalize your mortgage with your lender.
Prepaid Interest at Closing
Before you figure out when is the best time to close on your mortgage loan, it's a good idea to gain an understanding of what happens at closing. 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. That means you'll pay a bit of interest up front, because interest starts to accrue the day you settle on your house.
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.
It's not as if it's going to cost any more; you'll still pay the same amount. You'll just pay more at the beginning of the loan period.
End of the Month
Since you're required to pay prepaid interest for each day of the remainder of the closing month, closing at the end of the month is the best time of month to close when buying a new home. 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 of the next month, you could end up having to pay 30 or 31 full days of prepaid interest.
It may also help if you are paying homeowner's association dues. Paying at the end of the month may be a bit cheaper, since HOA dues are usually prorated.
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 earlier 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 mortgage payment when you close on a mortgage loan. In most cases, a mortgage payment is due on the first of the month. The lender may skip one month after the closing month and then the first payment is due. This is not always the case, but if it is, it allows you a short break before having to resume payments after the long and expensive process of closing your mortgage loan. If you are paying rent and you are given a month before you need to start paying your mortgage, that may give you extra cash to pay your final month's rent.