Timing When Buying Can Reduce Closing Costs
When Buying a home, the month of the year and the day of the month can affect your closing costs.
I originally published this article in 2009. It’s been updated and republished it in December 2017 because I think this is a very important part of understanding, and controlling your closing cost expectations when you buy a home.
Some closing costs are variable. These costs are typically based on either the loan amount or purchase price. Examples of variable closing costs include lender fees, escrow or attorney, title and recording fees.
Closing costs collected for funding an escrow (or impound) account is called pre-paid closing costs. Included in this category is the interest you pre-pay until your first mortgage payment is due.
“When” you buy can also dramatically affect your closing costs. That is what were going to talk about today.
Interim Interest is the first pre-paid closing cost we’re going to talk about. It’s calculated daily, and included in your closing costs. This closing cost represents the interest due on your mortgage from the date you close escrow, until the date your first payment is due.
Unlike your rent payment that’s made on the first of each month, mortgage payments are always paid in arrears. This means that on the first of the month, you are paying the principle and interest that accrued on the loan during the previous month.
If you close your loan in August, interim interest for August will be calculated from the day you close escrow to the last day of August.
Your first mortgage payment will be due on the first day of October for the principle and interest accrued through the month of September.
It is for this reason that when you close escrow on your new home purchase part of your closing costs will be the interest due from the day you close until the end of that month. Let’s look at an example of how this works.
Interim Interest Calculation Example:
- Loan Amount: $250,000
- Interest rate is 5.75%
- The daily interest is $39.38 (loan amount times interest rate, divided by 365 days)
Timing the Closing to Control Costs
- If you close your loan on the last day of the month…..You will pay $39.38 for interim interest for the one day.
- If you close your loan on the first day of the month….You will pay $1,181.40 for interim interest for the 30 days until the end of the month.
Let’s say you have a 30 day escrow on an offer that was accepted on the 5th of the month. The home is vacant, the seller is ok with closing early (as most are) and your lender is clear for docs on the 20th of the month…….
Here’s an opportunity to close escrow a week early and save yourself over $1,100 in closing costs.
Ok, so this is not going to make you fall out of your seat from the savings but I think you get the idea. Obviously the actual numbers will be different for your purchase and you have the formula now, you can do the math yourself.
When it comes to scraping up the money to close….every cent counts.
Pre-Paid Taxes & Insurance
Tax impounds are when you have your property taxes (and homeowners insurance) included in your monthly payment. The big number here is the property taxes, so we’re only going to address that.
When you have an impound account, the lender is collecting the monthly equivalent of your taxes that will be due and making that payment on the due date.
The advantage of this is that you do not have a big tax bill that could cause serious strains on your cashflow. The disadvantage is that you have to fund this account upfront.
Timing the Closing to Control Costs
Not all loan programs require that you pay your taxes and insurance as part of your payment. It is most common on loans with less than a 10% down payment.
If you are using a loan that allows you to exclude tax impounds there is almost always a cost. An impound waiver may add to the closing costs of the property.
Being aware that these costs are different depending on what day and what month you buy your home will help you to prepare your budget accordingly or ask for those closing costs from the seller!