You finally found the house you desire and you are going to write an offer with your Realtor. The Realtor tells you that the Seller would prefer to close at the beginning of a month BUT you have been told by friends and family that you should close only at the end of the month because it will cost you less and you will be saving on the interest!! What to do??

Let me explain. All mortgage payments are paid in ARREARS. This means that any mortgage payment covers the interest owed for the preceding month. (It’s the opposite of rent payments, which are due in advance each month.)

Lenders don’t lend ANY money for free. It seems that there’s a common belief that you can “save” a lot of interest by settling at the end of the month. NOT TRUE. Your friends and family are confusing “saving” interest with pre-paid interest.

Since mortgage payments are paid in arrears, your first mortgage payment will always be due at the end of the first full month you took out the loan. So if you settle in early December, your first full month will be January and your first mortgage payment will be due February 1st – almost two months after settlement.

If you settle at the end of November, your first full month will be December and your first payment will be due January 1st – about one month after settlement.

Your friends and family are really referring to the interim interest that must be paid at the time of settlement. If you settle in the beginning of ANY month, you will be required to pay the interim interest from the day you settle to the end of the month.

If you settle on the tenth of the month, you would pre-pay roughly 20 days of interest to cover the period from the tenth to the end of the month.

If you settle on the 30th, you wouldn’t pre-pay any interest but your first mortgage payment would be due in one month’s time.

So, settling at the end of the month doesn’t “save” you any money. However, if you are really short of cash at settlement time it will reduce the amount of funds required at the settlement table.

I hope this explains clearly this matter of whether or not your closing date makes a difference!!