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Why You Should Close Escrow at the End of the Month?
After several months of search, visits and paperwork, you eventually found the house of your dream. It was love at first sight with your house. Fortunately, the seller accepted your offer helped by your real estate agent. You are about to close the deal. You are already imagining when you are going to move with your wife and your two kids. However, your realtor is advising you to wait until the end of the month to close the deal. Why does your real estate agent give you this piece of advice?
Basically, your real estate agent knows that you are financing your house with a mortgage. Therefore closing at the end of the month, it will allow you to lower your out of pocket costs by minimizing the amount of prepaid interest that you have to pay on your mortgage at closing.
Normally interest on your mortgage begins running from the date your transaction closes, but most loans are due on the first day of the month. So when you close, you have to pay in advance or pre-pay the interest between the closing date and the end of the month. For instance, if you close on the 29th of October, you have to pay in advance one day of interest to cover the rest of October's interest. Your first payment will be due December 1st, when you will actually be paying November's interest. You may think that the advantage of closing one day before is small.
But now, let’s take a different example. Imagine that you close the purchase of your house on the 6th of November. In this situation, you will have to prepay 24 days of interest. This means you have to bring in more cash to close your real estate purchase than would have been required by closing just eight days earlier. You might not have planned these additional costs and may be out of money right now. It would be regrettable that you missed the purchase of your house or got into financial trouble because of the prepaid interests.
However, without minimizing the effects described earlier, you should know that the benefits of closing are only short-term. For instance, if you close the deal on October 29th, your first payment due-date will be December 1st. But if you decide to have a November 6 closing, your first payment is not due until January 1. It will just take less cash out of pocket to close near the end of the month. That is the main benefit of late-in-the-month closing.
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