Financial Closing Strategy: Is there a better time of month to close on a refinance?

A word from The Tim: This post is from long-time Seattle Bubble participant Tim Kane (a.k.a. “S-Crow”). As co-owner of Legacy Escrow in Everett, Tim brings a unique perspective on the closing table.


Timing Closing?

Closing TableOne question that frequently comes up when meeting with clients to sign loan documents is the question of “timing.”   Is it financially beneficial to close earlier in the month or later in the month?  In most cases the answer is that it makes no difference.

Interest is paid on the existing loan through the payoff date and interest is collected or “prepaid” on the new loan from the closing date through the end of the month.  The reason people often think that it is “cheaper” to close at the end of the month is because they are only looking at the “prepaid” interest.  For example, if you’re closing on the 10th, then the settlement statement would show 21 days of prepaid interest.  If you’re closing on the 20th then there would only be 11 days of interest.

However, if you’re also selling a home at the same time, you need to remember to look at the number of days of interest being added to the payoff balance of your existing loan. Typically the interest rate on the existing loan is higher than the interest rate on the new loan, so it would be slightly more beneficial to close as soon as possible.

Skipping Payments

Many people like the idea of “skipping” a payment.  Yes, you may not be making a payment directly to your mortgage company for one month (or sometimes 2 months) but interest is still being collected on the old loan until the time of payoff and interest accrues on the new loan from the closing date forward.  You are not getting out of paying interest.

One exception to this rule is if your existing loan is FHA.  FHA does not prorate interest on a daily basis.  The payoff balance will include interest through the end of the month.  Therefore with FHA specifically, it is very beneficial to close your refinance at the end of the month to avoid paying interest on both loans at the same time.


About S-Crow

"S-Crow" (Tim Kane) is co-owner (with spouse Lynlee, LPO-Designated escrow Officer) of Legacy Escrow Service, Inc., an authentic independent escrow firm closing residential purchase/sale and refinance transactions.

26 comments:

  1. 1

    I seem to recall reading that FHA (or maybe VA) doesn’t do per diem on loan payoffs, and that refinancing mid-month can be costly. I don’t remember where I read that.

    Here’s the first Google hit, but it’s older:

    http://www.mtgprofessor.com/A%20-%20Options/closing_date.htm

  2. 2
    S-Crow says:

    Hi Kary~
    FHA does not do per diem like I state above, but VA does. Closing FHA loans are a bit more stressful due to the fact that if the payoff does not arrive on time for whatever reason (Fed Ex or UPS delivery is delayed) an entire months interest could possibly be due (and guess who people will start calling first).

  3. 3

    That’s something agents will need to start thinking more about when reviewing offers or dealing with extensions. I’ve not liked end of month closings for other reasons (you escrow people are too stressed out!), but that’s yet another reason not to press the end of the month too closely.

    It hasn’t really been much of an issue before because there weren’t as many FHA loans out there.

  4. 4

    Ending Financing Before the End of the Month Payment saves a Month of Interest

    When you pay off a principle to get your home’s title, do it before the next payment is due, otherwise [in my experience] you have to pay a whole extra month’s ineterest…they time it in one month clumps…

  5. 5

    RE: softwarengineer @ 4 – That’s what we’re talking about. Apparently only FHA does it that way.

    Every loan payoff I’ve ever seen has come with a per diem, and the pay off date is typically in the middle of the month on the ones I’ve seen.

  6. 6
    S-Crow says:

    RE: Kary L. Krismer @ 5 -One way to be a step ahead of the competition is for agents to take the time to really grasp closing cost itemization’s and how to effectively prorate interest on loans (you’ll never be 100% accurate because of a variety things outside of your control, but you certainly will be closer than most). This greatly benefits your clients, promotes professionalism and reduces the issue of being a thousand dollars or more off on proceeds and, for loan officers, helping to reduce underestimating costs based upon payoff miscues.

  7. 7

    Tim, did I totally miss the last paragraph on FHA, or did you add it?

  8. 8

    RE: softwarengineer @ 4

    Actually, My Loan Wasn’t FHA

    It was a subcontracted loan loan out of BECU….some eastern bank bought it from another bank…

  9. 9

    Here’s a little known fact. At common law there was no right to prepay a loan. Thus if you took out a 15 year loan, you had to pay it off over those 15 years according to the terms. It’s possibly somehow part of how a pre-payment penalty can be valid.

    [Edit: I had a typo at first that said there was no right to repay a loan. That would be totally different! ;-) ]

  10. 10
    ray pepper says:

    “Many people like the idea of “skipping” a payment”

    The understatement of this decade!

  11. 11

    By ray pepper @ 10:

    “Many people like the idea of â��skippingâ�� a payment”

    The understatement of this decade!

    I’ve never even heard of doing that.

    You can have situations where the closing is near the beginning of the month where you might not want to pay because that payment might not be reflected in the payoff. The same issues can arise if a tax payment is due near the closing date. Sometimes you either want to make the payment early or not at all.

  12. 12
    S-Crow says:

    RE: Kary L. Krismer @ 7 – It was there. No worries.

  13. 13

    At 8:12 I should have my full dose of coffee in me. That’s scarey.

  14. 14
    S-Crow says:

    RE: Kary L. Krismer @ 11 – Escrow is dealing with the tax issue right now because first half taxes were due at the end of April. So we typically do a little more explaining on tax pro-rations and questions always come up during this time of year. It can get a little dicey on the financing end of things when waiting for taxes to post at the county and a closing is close to the end of April and the 1st week of May.

    People can go to the online services at the County in which the property resides to see if taxes have posted. A minor thing but It still baffles me why we see taxes from 2010 and earlier showing on listings.

  15. 15
  16. 16
    ARDELL says:

    RE: S-Crow @ 14

    Had a closing on April 21 and the RE taxes for the 1st half of 2011 had been paid by the seller’s lender, but the County had not posted them yet. There was a “hold” put on seller proceeds for an amount equal to the tax payment. It was released back to the seller after closing when the tax payment, made prior to closing, was posted by the County.

    On a side note, I’m surprised that all lenders do not subtract the amount held in the seller’s escrow account when preparing the payoff statement. Do you have a rough % of how many do vs don’t?

  17. 17
    Lynlee says:

    In my experience, probably 99% of the payoffs we receive do not have the escrow balance subtracted from the payoff balance. There are only a handful of lenders who do that ~ mostly local banks or credit unions.

  18. 18
    ARDELL says:

    Thanks Lynlee.

    Also worth noting for sellers, the release of escrow funds is generally automatic once the loan is paid in full. BUT you have to contact your Home Insurance Company the day after closing to cancel the policy, in order to get a refund from them of the pro-rated Annual Premium already paid by your lender. Return of monies held in escrow = automatic. Return of Pro-rated Annual Insurance Premium = NOT automatic. Pretty sure that is correct. Tim or Lynlee can verify.

  19. 19
    Marc says:

    I run into the prepaid interest issue frequently since we rebate the commission. Many buyers don’t appreciate that mortgage interest is not like rent, i.e., your payment on the first is for the month that just passed, not the month to come so we explain it to them.

    On occasion we run into a dumb loan officer or underwriter who doesn’t want to allow a commission rebate in excess of the buyers actual closing costs and prepaids (some lenders don’t want to hear that Fannie/Freddie allow adjusting LTV’s for financing and sales concessions – we avoid these imbeciles whenever possible) One solution we’ve used to increase our clients’ costs in a beneficial way is to prepay not only the current month’s prepaid interest but the following month’s as well. It pushes their first payment due date out an extra month and, in that way, is the same as cash back.

  20. 20
    ray pepper says:

    “we avoid these imbeciles whenever possible”

    I have an imbecile lender list when your ready for it! They all have the same problem.

    Incompetence and most likely some form of addiction:

    http://www.youtube.com/watch?v=PvnfmWsLbsY&feature=related

  21. 21

    Tim, thanks for writing this. I cringe when I see other mortgage originators promoting that people will “skip 2 (or 1) payments” when they refinance when we both know this is not the case.

    With FHA refis, I do try to close as close to the end of the month as possible so that my cilent is not paying double interest… I think it’s ideal if we close around the 27 (leaving a few days “just in case” w/the payoff).

  22. 22
    m-s says:

    RE: ARDELL @ 18
    Hi-
    What would be the purpose of canceling Homeowners’ Insurance (if that’s what you are talking about) after the loan is paid in full? Shouldn’t this liability/damage/flood package be kept in force? Unless perhaps the bank requires more coverage than necessary… I’m interested because I will be doing this (i.e. paying off) next month.

  23. 23

    RE: m-s @ 22 – I think she’s talking about a sale situation, where you no longer own the property.

  24. 24
    S-Crow says:

    RE: m-s @ 22 – I can’t think of any reason why you would want to cancel your policy until you have another in place if you are changing insurance co’s. Refunds coming out of your escrow account (whether for taxes or insurance) after a loan has been paid off depends upon your lender policy (generally, most insurer’s follow the same regulations when they cut refunds). Contact your existing lender for further details.

  25. 25
    ARDELL says:

    RE: m-s @ 22

    Check with the lender in advance. The escrows don’t forward over, so be prepared to fund the new escrow prior to your current escrow being refunded. It depends how many months are left on the policy binder and how old your current loan is. I have hard of “upgraded” insurance being needed, but seems to me that was for a condo or a property that was reassigned on the flood maps. Again, it depends on whether or not the new lender has a higher standard than your previous lender, especially if the loan you are refinancing is from a long time ago.

  26. 26
    m-s says:

    Thanks dudes (and dudette). I’m staying put (for now). As I understand, after the loan is paid, the escrow will be refunded. I will just start my own, to accumulate funds for Tax and Ins month by month. I will even get a pittance of interest… big whoop.
    As Ray explains, I will be able to save like a bandit, the only difference is they will not throw me out of my house in two/three years (unless I don’t pay my taxes).

Leave a Reply

Use your email address to sign up with Gravatar for a custom avatar.
Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Please read the rules before posting a comment.