There are a number of ways that you can structure or plan a closing so that you can maximize your specific needs when financing a home today. Assuming you have a choice on your closing day, here are three typical options.
Option number 1: The typical and assumed closing at the end of the month…
If you have bought a home lately, or refinanced, you might have heard someone in the transaction sphere of influence mention the large volume of closings that come together at the end of ever month. The idea is that if you close at the end of the month, you pay less prepaid interest. What that means is this; If you close on your home on say April the 30Th, the last day of the month, then you only borrowed money for your new loan for one day in April. They do not tack that one day on to the first payment of your loan, so you pay that up front at closing. You can see how if you closed at the first of the month how you would be required to come out pocket up front/at closing by much more money. In this scenario, you close on April 30Th and pay one day of interest up front at closing, you have no payment at all in May, and your first payment is due June 1st but isn’t counted negatively in any way until June 15Th. That is a 45 day no payment closing, and it works for refinancing and purchases
Option number 2: Close on your home loan the 1st day of the month…May 1st.
There is 31 days in May, and since you’ll have funds loaned to you all 31 days of that month with no mortgage payment, you’ll pay 31 days worth of interest at closing. AH, but you don’t have a payment in June at all. Your first payment is due July 1st and it is not late until July 15Th. That is two and a half months, or 75 days with no mortgage payment.
Option number 3: Close your home on the 1st day of the month with a “short pay”…May 1st
In a short pay, you do it all opposite of what the above options provide. You pay interest in days backward, and you make your first payment the very first month coming up. If you close on May 1st, you pay 1 day of interest up front, and your first payment is due June 1st and not late until June the 15Th. In this scenario, you don’t have a “mortgage payment” in May, so you still ultimately get a month with no mortgage.
Here are the calculations for closing scenarios for options 1-3 Using a new loan amount of $270,000 and a new interest rate of 4.875%. Please take not that two of the closings are on the same day, and the other one is 1 day before the other:
Option #1…Close April 30Th;1 day of interest = $36.56 paid at time of closing
No payment due until June 1st of $1,429 a month (Principle and interest on $270k at 4.875%)
31 days of May you have no payment…
Pay all other closing costs PLUS $36.56 AND then come up with 1st payment of $1,429 in June. From day of closing until June first you spend a total of = $1,465 and then another mortgage payment of $1,429 July 1st
Money spent total from closing to July first = $2,894
Option #2…Close May 1st 31 days of interest = $1,096 paid at time of closing
No payment until July 1st of $1,429 a month (Principle and interest on $270k at 4.875%)
31 days of May you have no payment, 30 days of June you have no payment…
Pay all other closing costs PLUS $1,096 AND then come up with 1st payment of $1,429 in July. From day of closing until June first you spend a total of = $1,465
Money spent total from closing to July first = $2,525
Option #3…Close May 1st using a “short pay”
1 day of interest = $36.56 paid at time of closing
Payment due June 1st of $1,429 a month (Principle and interest on $270k at 4.875%)
30 days of May no payment…
Pay all other closing costs PLUS $36.56 AND then come up with 1st payment of $1,429 in June. From day of closing until June first you spend a total of = $1,465
Money spent total from closing to July first = $2,894
The number 2 option here appears to save you $369 out of pocket in your closing scenarios. I know some of you are thinking, “that’s it! I’m going that route, and there is no discussion”. Others are taking a little longer look at it and seeing how the options for cash in the pocket for a little longer in the front might help here, but “yada yada yada”. Good! How ever you feel the options help you, that is what matters. Remember though, the majority of loans close at the end of the month and lender offices are busy busy busy towards the end of the month with such a work load, so consider closing at a different point in the month to avoid getting stuck in the traffic…you might have a hiccup in the process and when there is traffic, the slower you will be able to “get rid of you hiccup”.
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