Why Closing at The End of The Month Saves Money

When buying a home, one often overlooked aspect is the impact of daily interest charges and how they affect your closing costs.  Daily interest charges are the fees accrued on your mortgage loan on a daily basis. These charges are calculated based on the outstanding principal balance of your loan and the interest rate. Essentially, each day that passes, your loan accrues a certain amount of interest.

Interest Accrual Period and Closing Date:
The interest accrual period is the time between your closing date and the end of the month. For example, if your closing date is on the 15th of the month, the interest accrual period would be from the 15th to the last day of the month. During this period, interest charges accumulate on your loan.

Impact on Closing Costs:
a. Prepaid Interest:
During the interest accrual period, you will be required to pay the prepaid interest for the remaining days of the month. This amount is typically due at closing and becomes part of your closing costs. The prepaid interest covers the interest charges from the closing date until the end of the month.

b. Effect on Loan Amount:
Since the prepaid interest is added to your closing costs, it affects the total loan amount. The higher the loan amount, the more you will pay in interest charges over the life of the loan. Therefore, daily interest charges indirectly impact your long-term mortgage costs.

Closing Date Selection:
Choosing the right closing date can help minimize your closing costs. Opting for a later closing date in the month can reduce the number of days in the interest accrual period, thus lowering your prepaid interest charges. Conversely, closing early in the month will result in a more extended interest accrual period and higher prepaid interest.

Loan Lock-in:
Another important consideration is a loan lock-in. When you lock in your interest rate, you protect yourself from potential rate increases during the loan processing period. This can be advantageous if interest rates are expected to rise. However, if the lock-in period is longer than anticipated, it may result in additional interest charges and potentially higher closing costs.

Daily interest charges are an important part of your closing costs when buying a home. Understanding how they affect your overall expenses can help you make informed decisions during the loan application process. By carefully selecting your closing date and understanding the nuances of interest accrual, you can potentially minimize your closing costs and optimize your long-term mortgage savings.