Closing dates
I’m still working on the foreclosure/short sale post, so look for that this week or next (and e-mail your questions if you haven’t already).
I did get a question recently that I wanted to quickly post the answer to: “Is there any strategy in picking a day of the month for a closing? Is it more beneficial to me as a borrower/buyer to want to close early or late in the month?”
Read my answer, after the jump.
The answer is that when you close can impact how much money you have to bring to closing, but ultimately it comes out in the wash. The issue boils down to adjustments and interest. The HUD-1 Settlement Statement adjusts taxes and condo fees (if necessary) between the parties. Also, unlike rent, monthly mortgage payments cover the principal and interest for the prior month (so your October mortgage payment is for September principal and interest). Therefore, at closing, banks usually require that you pay the interest for the current month at closing, so that your next mortgage payment isn’t due until the first day of the month following the month after the closing (with some rare exceptions during the first five days of the month).
Example 1: Condo closing on October 15th. At closing, the borrower will reimburse the seller for 16 days of condo fees, since those are typically due on the first of each month and the seller must provide a document at closing saying the condo fees are paid through the end of the month. Also, there will be an adjustment for taxes for the tax period, either from buyer to seller (if they were already due and paid) or from seller to buyer (if they are not yet due and payable and will be paid in the future by the buyer). Additionally, the buyer will have to pay mortgage interest from 10/15-10/31 (often thousands of dollars, depending on the loan amount), meaning the buyer’s first full mortgage payment will not be until December 1 (for November principal and interest), a full 6 weeks after closing.
Example 2: Condo closing October 31. In this example, the condo adjustment is just for one day and the tax adjustment may or may not help reduce the amount of funds needed at closing (depending on whether they’ve already been paid by the Seller). The interest will be for one day, which is going to be very low; however, the buyer will then have his next mortgage payment due on December 1, which is only one month after closing.
So as you can see, it comes out in the wash. My advice to my clients is that you should have enough money available to close at any time during the month, since many times a closing scheduled for the last day of the month gets delayed for whatever reason and the closing doesn’t occur until the beginning of the next month.
Regarding the rare exception mentioned above about the mortgage interest: sometimes lenders will have the closing attorney back out the interest if a closing occurs right at the beginning of the month. For example, in rare situations a lender will give an interest credit for a few days and then make the mortgage payment due on the first day of the month following the closing (so if you close on October 3, a lender will give you a three-day interest credit and then your first mortgage payment is due November 1). I believe this happens so infrequently because there are regulations regarding making your first mortgage payment within 30 days of closing. Therefore, the usual protocol is to add interest from the date of closing to the end of the month.