When is a good time to close on a property. I have heard it’s good to close on the first of the month and I have heard it’s better to close at the end of the month. Can anybody tell me what the pro’s & con’s are to closing earlier or later in the month? Thanks, Joe.
If you are financing part of the purchase price through an institutional lender, the lender will collect interest on the mortgage at settlement for each day until the end of the month in which settlement occurs. Example: you close on July 2. At settlement you would have to pay 30 days of interest on the amount of the mortgage. This is why buyers often try to settle as close to the end of the month as possible. The date of settlement can also affect other charges that are pro-rationed, like homeowners’ association fees.
Buyers may decide to close at the beginning of the month just because they need to be in place, or have to give possession at that time of the property they’re leaving, or possibly because the seller needs closing to occur then.
Thanks for your response. I now have another question? How is the morgage payment effected by either closing at the beggining or at the end of the month? I though I heard somewhere that a person would get an additional month where they don’t have to pay on their mortage if they close at the beggining of the month. Is this true? Or can you shed some light on this for me as well. Thanks, Joe.
I think the way it works is that regardless of what day in the month closing occurs, you skip a month–the first mortgage payment wouldn’t be due until the second month after the month in which closing occurs. That’s my recollection, but I haven’t brokered houses for a while. A mortgage officer would be the best source on that question.
Thanks for your help. Joe
Most of the responses you received discussed the interim interest you are (pre)paying on your loan because mortgage interest is collected in arrears and assumed that you are the buyer.
As was mentioned before, when you settle at the end of the month – say June 28 – interim interest on your mortgage loan is collected at settlement for the month of June. This amount to only three days of interest until the end of the month. The interest for July is collected when you make your first mortgage payment on August 1.
WHEN YOU ARE THE BUYER:
Settling earlier in the month just makes your interim interest payment larger at settlement – or so it would seem.
Once I was settling on a purchase on August 3. I told the lender that I would make my first mortgage payment on September 1. Because the August loan interest is collected at the end of the month as part of the September 1 mortgage payment, the lender was going to collect a full month of interest for August. At settlement, I received a CREDIT for the two days of August interest that was not part of the loan term.
Settling early in the month could give you cash at closing from your lender.
Another reason to settle early in the month is when you are purchasing a rental property with tenants already in place. When rents are prorated, you will receive a credit at settlement for all the SCHEDULED rent the seller collected (or should have collected) on the first of the month PRORATED from the day of settlement to the end of the month. Closing early in the month gives you use of the tenant’s rent money for that month.
Suppose you have the cash on hand for settlement and you are purchasing a vacant property that needs fixup for rental use. Purchasing early in the month gives you the rest of the month to complete your repairs/fixup and begin marketing. The first month of your ownership is usually a full vacancy anyway while you are making repairs, so purchasing near the beginning of the month might reduce your vacancy period somewhat. Compare to closing at the end of a month, then having the entire next month vacant while you fixup and then market.
If none of these special situations apply to you, then it does not really matter what day of the month you settle when you are the buyer. At the end of the year, your mortgage interest expense will be exactly what you owe on your borrowed money.
WHEN YOU ARE THE SELLER:
If you have an FHA loan or a HUD insured loan, your loan documents may state that mortgage interest is collected for the entire month the loan is paid off. For example, you settle on the 15th of the month, but since you have one of these loans, your payoff will include interest to the end of the month – an extra 15 days or so. In this case, you want to try to schedule settlement near the end of the month, say on the 25th.
Be careful about settling on Thursday or Friday. If your settlement agent is sending a check to the lender, you will still pay interest on your loan until the full payoff is received by your lender and posted to your account. Checks overnighted on Thursday or Friday might not be received and posted until perhaps Tuesday the following week, so you are paying interest on your loan over the weekend. In this case, try to settle on Monday or Tuesday of the week. When your settlement agent is doing a wire transfer, try not to settle on Friday. Funds wired to your lender on Friday might sit over the weekend and not be processed until Monday. Again you are paying mortgage interest for a weekend you did not actually own the property secured by the loan.
If you are a landlord selling a property with tenants in place, it is to your advantage to settle near the end of the month instead of the beginning of the month.