When you close on your new mortgage you may be able to save on your out of pocket expenses by closing late in the month. You will be required to pay the interest due from the day you close until the end of the month; the closer to the last day of the month you can close on the mortgage, the less you will have to pay out of pocket.
Mortgage payments are typically made for the previous month. After you close on your mortgage your first mortgage payment will be due two months later; for instance if you close in May your first payment is due in July. This mortgage payment covers the interest due for the month of June. Interest on the mortgage starts accruing the day you close. This unpaid interest will be due at closing; if you close on the last day of the month you will only be charged one day of interest.
Here is an example of the potential savings.
If you borrow a $150,000 at 6.5% interest the daily amount you will pay in interest is calculated by multiplying the loan amount by the interest rate and diving by 364 days. For this example, the daily interest rate is ($150,000 x .065) = $9750/364 = $26.78 interest per day.
If you were to close on the 15th of May you would be required to pay 15 days worth of interest which amounts to $401.70. By closing on the 30th of May you would be required to pay interest for two days in the amount of $53.56.
The amount of your savings depends on your mortgage closing dates. If you are unable to close at the end of the month and your closing date spills over to the first week of the next month, your closing costs will increase dramatically. To learn more about saving money on your mortgage register for our free mortgage guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”