14 Jan 2011

How the Closing Date Affects Closing Costs for Home Buyers

 Understanding How the Actual Closing Date on a Home Purchase
Can Affect a Buyer’s Closing Costs!

Yes, there is an often overlooked cost related to the mortgage in closing on a home purchase! And that is the interest rate adjustment from the day of the closing to the last day of the month.

Let me clarify first. There is a difference in paying rent to a landlord as compared to paying the mortgage to the bank. Rent is due on the first day of the month and is paid for the month in advance. Rent is paid on January 1 for the enjoyment of using the apartment for the month of January. A mortgage is paid to the bank on the first of the month, but it is for the interest expense for the previous month.  When a mortgage payment is made on January 1, the interest espense is for the month of December. In other words, a mortgage payment is an after the fact payment.

With that in mind, if a buyer closes on a home purchase on January 31, 2011, the first mortgage payment will be due on March 1, not February 1. The mortgage payment due on March 1st is for the interest expense for the month of February. Again, a mortgage payment is an after the fact payment, paying for the previous month’s interest for the use of bank’s money.

But what happens when the closing date is not the last day of the month? What happens if the closing is on January 10th instead of the 31st? Well, the first payment is due on March 1st, just as it would be if the the purchase closed on the 31st. No, a buyer does not to live in the home from the 10th to the 31st without paying the interest on the mortgage loan for those 21 days. And this is where many buyers are actually caught by surprise at their closing when the closing costs are hundreds of dollars more than what they were prepared for and were told.

If a buyer is borrowing $275,000 at 4.75% interest and the real estate closing is on January 10th, there will be an adjustment  for interest from the day of the closing to the last day of the month. It is simple to calculate. Multiple the interest rate(.0475) by the mortgage amount($275,000). That equals $13,062.50 which represents annual interest. Divide that total by 365 to obtain a daily cost($35.78). Then multiply that by the balance of the days in the month(21). The total is $751.38. 

In this example, there will be a charge at closing of $751.38 for prorated interest from the day of the closing to the last day of the month. Needless to say, if a buyer was not aware of this or did not prepare for this expense, a difference in $751.38 in closing cost expenses could be more than just surprising!

Whether you are buying a home in Iselin, New Jersey, Colonia or Edison, in Middlesex County or in any other other State, obtaining a thorough understanding of the expenses in purchasing a home and obtaining a reliable estimate of closing costs is important for home buyers.

Look for a future post here: More Considerations in Selecting a Closing Date.

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