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Closing Costs when buying a home

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.

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“When” you buy can also dramatically affect your closing costs.  That is what were going to talk about today.

Interim Interest

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.

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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…….

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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.

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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!

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About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • Lauma Jurkevics says:

    Hi Scott,
    Thank you for this article (and everything else you have written), as well as all you are doing to educate buyers.
    Just so I have this straight… The last day of February would be when one would pay the least amount of closing costs, while the first day of September would be when one would pay the most in closing costs?

    • Scott Schang says:

      Hi Lauma,

      Yes, it’s true that more money is required to close depending on how close you are to the due date for property taxes and the day of the month. Timing the property taxes is much easier than trying to time the day of the month. I recommend trying to close the last “half” of the month to reduce the interim interest that is included in your closing costs. Anything can and usually will go wrong if you wait until the last minute. If you miss the last day of the month by one day…..you pay 30 days of interest…UUUUuuuugh!

      Thank you for your comment, I appreciate you taking the time to write.

      Scott

  • dodo gamo says:

    Hello,
    I am a bit confused with something. If I understood well,an impound account mean taxes will be collected every month as part of your monthly payment. So, in the example, the 9 months upfront cost, what are they for? does it mean you will advance 9 month of tax payment and for those 9 months you will not be charged taxes on your monthly payment?

    • Scott Schang says:

      It is confusing. The taxes are collected before they are due. Depending on the time of the year, and when the next tax installment is due, will determine how many months need to be collected up front so that they are available when due. In addition to collecting for the installment that is due, they will usually collect a couple of months of the following installment as well. There is never any time that you are not paying your taxes and they will always collect more than is required. That is your money though, if you refinance or sell your home you will get that money back.

  • Mari McMahon says:

    I had a long delailed question that the computer wiped out, so here is the short version. How did you calculate the “knowledge is Empowerment ” paragraph. Also, How calculate # of months Tax from August – if due Nov 1st – aug – dec is 5 months, not 8.?

    • Scott Schang says:

      Hi Mari,
      I know, it doesn’t add up exactly – The lender collects more than what is due on the due date for taxes, so even after making the tax payment – they have a head start on the next installment. I took these numbers off a schedule that we have to comply with per our investors.

      Good question!

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