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Ask Dr. Don
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 daysí 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.

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So, if you close Aug. 30 you only pay two daysí 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 isnít due until Nov. 1.†

The table below shows the difference in cash flows between the two approaches.

 

Aug. 30, 2002

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

†$36.11

†$523.61

Oct. 1 mortgage payment

†$632.07

†$††††††††††††† -††

Nov. 1 mortgage payment

†$632.07

†$†††††† 632.07

Total principal & interest through Nov. 1, 2002

$1,300.25  
$1,155.68  
$(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 loanís closing date.† Closing sooner means that you start accruing interest expense sooner.

-- Posted: Aug. 22, 2002

Read more Dr. Don columns
See Also
Closing costs: Are you paying too much?
Should you roll closing costs into your mortgage?
Should you pay extra interest to avoid closing costs?
Financial advice glossary
More Dr. Don stories

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OVERNIGHT AVERAGES
Rates may include points.
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