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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
When should I close?
Dear Dr. Don,
Is it better to close at the end of the
month or the beginning of the month?
Thanks,
John Juxtaposition
Dear John,
Closing at the end of the month reduces
the amount of prepaid interest you have to pay at closing. If you
close on Aug. 30 then you only have to pay two days’ worth of prepaid
interest. The first mortgage payment would be due Oct. 1 and would
include interest on the loan for September.
If you closed on Sept. 2, 2002
then at closing you would pay prepaid interest for the rest of September.
Your first mortgage payment would be in November. The November
payment would include interest on the loan for October.
So, if you close Aug. 30 you only pay two days’ worth
of prepaid interest at closing but your first mortgage payment is
due Oct. 1 and if you close on Sept. 2 you pay 29 days worth of
prepaid interest at closing but your first mortgage payment isn’t
due until Nov. 1.
The table below shows the difference in cash flows
between the two approaches.
|
|
Aug. 30, 2002
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Sept. 2, 2002
|
|
|
Loan amount
|
$100,000
|
$100,000
|
|
|
Loan term
|
30-year fixed
|
30-year fixed
|
|
|
Interest rate
|
6.50%
|
6.50%
|
|
|
Prepaid-interest days
|
2
|
29
|
|
|
Prepaid interest paid at closing
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$36.11
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$523.61
|
|
|
Oct. 1 mortgage payment
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$632.07
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$ -
|
|
|
Nov. 1 mortgage payment
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$632.07
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$ 632.07
|
|
|
Total principal & interest through Nov.
1, 2002
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$1,300.25
|
$1,155.68
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$(144.57)
|
The $144.57 difference in cash flow through Nov. 1,
2002 represents the principal component of the Oct. 1 mortgage payment
of $90.40 and the three additional days, Aug. 30 to Sept. 2, of
interest expense on the loan of $54.17.
Although you need less money at closing when you close
at the end of the month, the trade-off is that you start making
mortgage payments sooner. Interest accrues on the loan starting
on the loan’s closing date. Closing sooner means that you start
accruing interest expense sooner.
-- Posted: Aug. 22, 2002
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