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.
One 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.
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.