You may get more time than you think to make your first mortgage payment after the closing. You would think it would be due the 1st of the month following your closing, but it’s usually not. Luckily, you get an entire month before you have to make that first payment.
Keep reading to learn how this works.
You Make Mortgage Payments in Arrears
The interest you pay in your mortgage payment covers the prior month. For example, your mortgage payment for March covers the interest from February. Therefore, when you close on a loan, you don’t owe interest until you hold the loan for one month.
There is an exception to this rule, though. You have to cover the interest from the date of your closing through the end of the month. For example, if you close on the 15th of the month, you must pay the interest from the 15th to the end of the month. This occurs because you won’t have a mortgage payment the following month. You have to pay that interest upfront. You’ll see it labeled ‘prepaid interest’ on your settlement statement.
When Should You Close on Your Loan?
In a perfect world, you would close on your loan on the last day of the month. This reduces the amount of interest you’d owe at the closing. In other words, it lowers your closing costs. It would also decrease the amount of assets the lender must verify.
A majority of homebuyers push to close at the end of the month, though. This may make it impossible to get that closing date on the very last day. Generally, you’ll end up paying at least a few days of interest. You can ask your lender the amount of the ‘per diem’ or per day interest so you can determine how much it will cost you to close sooner.
Making Your First Mortgage Payment Early
There is one way you can avoid paying interest at the closing altogether. It’s called an interest credit, but it only applies to those closing on their purchase within the first few days of the month. Let’s say you close on your mortgage on September 3rd. Rather than paying interest from the 3rd through the 30th, the lender can give you an interest credit for 3 days. Your first mortgage payment would then be due on October 1st, rather than November 1st.
What Can You Afford?
Deciding whether you should close at the start or end of the month depends on what you can afford. It also depends on the seller’s ideal closing date. The closing date is a part of the negotiations in the purchase contract.
Sometimes sellers have a specific day they must close in order to accommodate for their next home purchase. They may also have other reasons for requiring a specific date. Considering the seller’s needs and the money you have for closing will help you decide what’s right.
The typical borrower closes on their loan at the end of the month, paying the per diem interest for the few days that are left. This gives you a little extra money to cover the cost of moving into a new home. However, it’s an option to close at the beginning of the month in many cases. Talk to your lender about your options to see which is the most affordable for you.
You’ll end up with one of two situations:
- Slightly lower closing costs, but a mortgage that is due the very next month
- Slightly higher closing costs, but a month off from mortgage payments
Compare each option to determine which works best for you while also comparing the programs offered by various lenders.