Understanding Mortgage Closing Dates

The interest clock on a mortgage starts ticking the day funds are disbursed, typically the closing date of a purchase or three days after the closing of a refinance. Fund disbursement on a refinance occurs after a required three-day period during which the borrower can rescind the transaction.

Mortgage interest payments cover an entire month, except for the very first and the very last payments, which cover an odd number of days.

Here’s an example of how interest payments work with a standard mortgage:
A homebuyer takes out a mortgage on which the first month’s interest is $600, or $20 a day. If the loan funds are disbursed April 25, the borrower will pay $100 ($20 multiplied by the five remaining days of the month) at closing. This is called “per diem interest” on the closing statement. On June 1, he will pay $500, covering interest for the month of May. If he repays the balance in full on Dec. 5, his final interest payment will cover the five days in December.

Here’s a question from a reader that explores the same issue:

“We purchased a home that should be completed in late July. A friend said that it would it be advantageous to close in early August as opposed to July 29. Is that correct?”

While borrowers on purchase transactions pay interest beginning on the closing date, they may pay it in different ways, depending on what day of the month they close.

If you close on July 29, for example, you pay interest at closing covering July 30, July 31 and Aug. 1. Your first monthly payment due Sept. 1 pays the interest for the full month of August.

If you close the first week of August, say Aug. 3, you may have a choice.

You can pay interest at closing for 29 days, with the first regular payment due Oct. 1. The cash required at closing would be higher than if you closed in late July, but the first payment would be pushed out almost a month.

Alternatively, you can receive an interest credit at closing for three days, with the first monthly payment due Sept. 1. The cash required at closing would be lower in this case, which is probably what your friend had in mind. But you would pay a full month’s interest on Sept. 1, even though you did not have the loan for a full month.

Bottom line, there is no financial advantage to closing on any particular day of the month, so select a closing date as close as possible to the moving date, regardless of when in the month the transaction occurs.

Refinance Transaction
In principle, refinancing should work the same way as purchasing.

If your refinance is funded on the third day of the month, for example, you should pay per diem interest for three days to the old lender and 28 days’ worth to the new lender.

Unfortunately, because of glitches in the system, it doesn’t work out that way.

Borrowers often are charged interest by both lenders for at least one day and sometimes for two or three.

The major reason seems to be that the funds don’t move directly from the new lender to the old lender. They are held by an intermediary until the new documents have been recorded, and that process takes time.

Because recording offices are usually closed on weekends, borrowers who close on a Friday are especially likely to pay double interest for several days. So don’t close on a Friday if you can avoid it.

There are No Free Lunches on Closing Dates
Here’s another reader question about closing dates:

“If I close on May 1, why does the lender allow me to go until July 1 before making the first payment? What does the lender get out of it?”

There are two possible explanations.

“If I close on May 1, why does the lender allow me to go until July 1 before making the first payment? What does the lender get out of it?”

The first is that you pay interest for the month of May at closing, and you pay interest for June on July 1. In this situation, the lender collects all the interest that is due and has given away nothing.

The second possibility is that you do not pay interest for the month of May at closing but your first payment remains due on July 1. In that event, the lender is adding the interest for May to your loan balance, so you will be paying interest on it for as long as you have the loan. The lender is giving away nothing here, either.

Lenders are not known for bestowing gifts on borrowers at closing.