Can you really save money by closing on your house near the end of the month?

A little background first. You generally pay rent for the month just beginning. But your mortgage payment, including interest, generally takes care of the month just passed. You can close on a house any day during a month. Let’s say you close on September 15; your initial mortgage payment would be due November 1. That payment includes interest for October. What about the second half of September? Did you pull a fast one? No. This "interim interest" is paid at closing. Obviously, the closer your closing is to the end of the month, the smaller this amount will be.

This is what makes closing near the end of the month so appealing to homebuyers. You owe less up front. In many cases, homebuyers are really strapped for cash and they are counting every penny right around closing. Closing near the end of the month can help with your cash flow, and it can give the illusion of saving money – but you really don’t save any money.

Whereas, other homebuyers aren’t so sensitive to that one-time interim interest payment, and instead love the fact that their first mortgage payment isn’t due for well over a month. If you are one of these people, then closing just after the month begins is right for you.

Interim interest can play a major role when it comes to refinancing a home as well. Many times a homeowner will calculate the amount needed on a refinance based upon their current mortgage balance plus costs involved. The one calculation we see borrowers miss time and again is the accrual of interim interest on the old mortgage. Many times a borrower will call their current mortgage holder at the beginning of a month to find out the amount of their current principal balance. If they wind up closing on their refinance at the end of the month, they may be shocked to learn the amount needed to pay off the old mortgage is much greater than the original quote. What’s more, many individuals who are refinancing won’t make the mortgage payment that is due just prior to closing on a refinance. So if the closing on a refinance were scheduled for September 15, many borrowers do make the payment due September 1. Since that payment would pay interest due for August, they now wind up owing interest for the full month of August and half of September at closing.
This can be an unpleasant surprise at the closing table. In order to avoid this, a good rule of thumb is to expect costs at the time of closing to be higher than expected by the equivalent of one monthly payment.

This article is based on information and research from articles written by Barry Habib