Closing at the end of the month
ARDELL on 08 7, 2007
You may wonder why closings are more often scheduled for the end of the month than any other time. This is typically done for two reasons.
1) An offer to close by month end is sometimes more attractive to a seller, as it “saves him” having to pay another mortgage payment.
2) From the buyer’s perspective, it reduces the amount of cash needed to close.
For conventional loans, no one is really saving any money, as you will pay interest up to the day of closing one way or another. So the cost is not so much the issue, as having the cash to meet the requirements.
If your interest per month is $3,000, $100 a day, and you close on the 10th of the month, you have to pay 20 days interest through the end of the month, at closing. That’s an extra $2,000 of cash needed to close. If you close on the last day of the month, that $2,000 is reduced to 0-$100 dollars. Pretty simple.
If you close on August 31, you pay no or 1 day interest at closing, and your first payment is due October 1. If you close on September 10th, you pay 20 days interest at closing, but your first payment isn’t due until November 1. Anyway you slice it, you pay one day’s interest for every day you have their money. But if you have barely enough to pay the downpayment and closing costs and need some money for moving and things for the house, end of month is often the chosen method of “saving” a few dollars.
One way closing at month end can truly save dollars, is if you are currently renting. If you vacate your rental by month end, it saves you the next month’s rent. If you close on the 10th, often the landlord will not give you a break and charge you to the end of the month. In that case you are paying mortgage interest during the same time that you are paying rent.
Of course Closing Agents go batty if EVERYONE wants to close on the very last day, and the rest of the month there are no closings at all. They hate when someone publishes an article suggesting closing on the last day of the month. The expectation these days is that closing will be about 30 days from the day you write the offer. If you write an offer on the 10th, the end of the month may be too soon and the end of the following month may be too long, if the property is vacant and you are competing with other offers.
A couple of exceptions, some lenders provide for closing on the 1st to the 5th to be “as if they are month end” to alleviate the pressure on closing agents on the last day of the month. You have to check with your lender on that. Also FHA used to calculate interest to the end of the month, and not provide for a per diem interest amount. That would be an example of when it actually does cost you more to close on the 20th. I haven’t seen a lot of FHA loans for awhile, so I’m hoping a mortgage person will clarify this in the comments.
If I had to guess, I’d say that at least 60% of all closings are written into the contracts for between the 25th and the 31st of each month. It’s one of the reasons I try to hold my questions of escrow for between the 5th and the 25th of each month. If we are going to write our closings for the last week of the month, we can at least hold our questions for times outside of that week, whenever possible.
About the Author: Ardell DellaLoggia
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That’s an informative article for a prospective buyer. Thanks!
Thanks, Ardell.
I was looking at the graph fo SFH inventory I’ve been recording. At the end of last month (starting on the 26th), the graph was flat and remained flat until the 6th or 7th when it started rising. It then leveled off again around July 22. My best guess as to why this was happening was that closings were bunched up around the start/end of the month and listings were being removed as fast as they were being added. Your and Tim’s answers help support that theory. It will be interesting to see if that pattern in inventory holds.
I did my stats for July, but I saved the pie charts as pdf and couldn’t upload them. Have to redo them in jegs. I’ll try to have them up tomorrow.
Thanx Ardell….being a buyers agent, it is also very beneficial to close @ the end of the month…..try to sign by the 25th (ish) & receive keys last day of month…..YAHOO!
On the flip side, the cons of closing at month end is that it is generally the busiest time for all services. Consequently you might get short shrifted as people are “too busy”. Rental trucks may be harder to come by. Movers may cost more as they are squeezing in all the movers at month end.
You might have a little more bargaining power if you are closing between the 10th and 20th.
Maybe an escrow company can offer a small discount for people who close at less busy times, to help alleviate the end of month crunch.
Great breakdown for our Buyers to understand what goes on. Yes, it saves on cash, but most do not realize they will pay either way so if they want to close….close.
Eric, you are correct.
Ardell, you tickle my funny bone!
Off topic: Nothing humors ANY escrow office or title company more than agents & loan officers who ask escrow to discount their fees for whatever reason. Or, ask escrow to stay late for loan documents than never arrive (or have been “coming” for the last two or three days) and if they do arrive, it is usually well after 3-4pm–then track down their very own clients at 8pm at night to sign them, only for the buyers to complain that the escrow fee is soooooo much higher than anyone else (laughable) and then to have the very same client ask why their initial interest rate on the 1st is 7.125% and over 11% on the second.
Makes for a humorous day at the office.
Maybe a surcharge for month end then
LOL, yes, maybe call it a gas surcharge….everyone delivering materials to our house for home improvement does for crying out loud. Getting ridiculous. We should place it on the HUD just for fun to see the looks on peoples faces.
hi i don’t understand this
You pay one day’s interest for every day you have the lender’s money. So the real cost is the same regardless. If you don’t have to worry about cash at closing, it doesn’t matter. If your cash is tight, then close near month end. It’s only the up front amount due at closing that changes.
Feel free to email me if you need more detailed explanation.
I’m glad raman commented…I think I must have been on vacation when you wrote this informative post, Ardell.
If someone closes on the 10th of the month or sooner, they can also close as an “interest credit”. There will be no additional prorated interest, however instead of “skipping a month” on the mortgage payment, it will be due on the following month.
For example, if someone is closing on Oct. 10, the could either have an interest credit (not pay prorated interest) and have their first payment due on Nov. 1 OR they can pay the 21 days of prorated interest and have their first payment due Dec. 1.
With interest being prorated for both buyers and sellers, it really doesn’t matter if it closes at month end or not. The interest credit/debit is still there. It’s more psychological if anything (closing at month end).
Where a difference could be is if the buyer or seller are trading higher or lower interest rates on their existing mortgages/financed property. Then there may be a cost difference involved.