Mortgage Closing Date: Does it Matter?

August 18, 2015

On a purchase transaction, there is no financial advantage in closing on any day of the month, as compared to any other day. On a refinance, however, it is a good idea not to close on a Friday.  

Closing Date and Per Diem Interest

The interest clock on a mortgage loan starts ticking on the date when funds are disbursed, which typically is the closing date on a purchase transaction, and 3 business days after the closing on a refinance.  (Fund disbursement on a refinance occurs after the required 3-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. Note: The above does not apply to simple interest mortgages and HELOCs, which accrue interest daily throughout their lives 

Here is an example: Interest for month 1 is $600, or $20 a day. If the loan funds are disbursed April 25, the borrower will pay $20x5 = $100 at closing to cover interest for the remaining 5 days in April. 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 December 5, his final interest payment will cover the 5 days in December.  

Purchase Transactions

 "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 the closing date, they may pay it in different ways, depending on when during the month they close. If you close on July 29, for example, you pay interest at closing covering July 30 and July 31. Your first monthly payment due September 1 pays the interest for the full month of August.

If you close the first week of August, say August 3, you may have a choice. You can pay interest at closing for 29 days, with the first regular payment due October 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 close August 3 and receive an interest credit at closing for 3 days, with the first monthly payment due September 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 months interest on September 1, even though you did not have the loan for a full month.

Bottom line, there is no financial advantage in closing on any one day of the month compared to any other, so select the closing date as close as possible to the moving date, regardless of the day of the month that is.

Refinance Transactions

In principle, refinancing should work in the same way as a purchase. If your refinance is funded on the 3rd of the month, for example, you should pay per diem interest for 3 days to the old lender, and for 28 days 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 1 day, and sometimes 2 or 3.

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 the weekend, 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

“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?”

If you close on May 1 and your first payment is due July 1, there are two possibilities. 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.

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