Timing a smooth closing day
Sam Schneiderman, Broker-owner of Greater Boston Home Team continues his Monday series.
Last Monday I wrote about How To Insure A Smooth Closing Day. After writing that blog, I began thinking that too many people set themselves up for stressful situations by timing their move based on incorrect information. With that in mind, today we will review some of the economic factors that can often be manipulated with wise scheduling when cash is tight:
The first thing that most buyers need to understand is that the day of month that they close will affect the amount of money that will be needed at closing. It is important to understand that unlike rent that is paid in advance (for the following month), mortgages are paid in arrears (for the prior month).
With most lenders, if you close on the first day of the month, the first mortgage payment is due on the first day of the following month. (i.e. close on August 1 and the first mortgage payment due on September 1 includes the principal and interest for the month of August.)
Because lenders are not set up to collect partial mortgage payments, if you close on any other day of the month (other than the first day) they collect interest for the rest of that month at closing. The next payment is then due on the first day of the second month after the closing. (i.e. if the closing is on August 17th, the lender collects prepaid interest for August 17 through 31 at the closing.
The first mortgage payment is then due on October 1 and includes the principal and interest for the entire month of September.)
Tenants that pre-paid their last month’s rent in advance will not have to pay rent for the last month in their apartment.
Sellers will also have to pay interest for every day that they are in the house, but any interest due will be included in the final payoff figure for the seller’s lender.
Perspective:
If buyers can’t or don't want to pay interest for the balance of the month at closing, they can close on the first day of the month or negotiate a closing date late in the month into the offer. In the end, interest will be paid for all of each and every day of ownership, but timing the closing will make a difference in how much money needs to be brought to closing.
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Oh boy Mister... you are wrong on the payment timing!!!
If you close on the 1st, or even the 2nd, or the 10th, interest is collected at closing for that month, 'til month end. There is NO payment due on the first of the next month because like you said, interest is paid 'in arrears.' Your payment would be due the first of the following month.
Real World: Close on August 1st... pay into escrow at closing the interest for the month of August. First payment due October 1st, which is principle, and September interest blended.
Sam has it right, I think the commenter above misunderstood his post. But I have had one closing in my time that the buyer did not pay prepaid interest and taxes but had a prorated mortgage payment on the first of the following month. Closed in early June (not the first) and had a partial payment on July 1st due.
This blogger might want to review your comment before posting it.