Most people are aware of home buying’s seasonality; March and April are generally the hottest months for sellers, evidenced by the “for sale” signs that pop up every spring, while buyers are more likely to get a better deal in the winter, when demand is lower. What’s not common knowledge, however, is how buyers can save money by closing at a certain point in the month.
General sentiment suggests that buying a home toward the end of the month isn’t smart, as the paperwork can take longer to process, with lenders up to their ears in loans that need to be sorted through by the 30th or 31st. Inconvenience aside, though, there are a number of financial incentives to closing later in the month; we came up with three reasons you’ll save money if you wait till the last couple of days to buy.
You’ll save on prepaid interest: Mortgage payments are different than most monthly payments, in that the interest is collected in arrears. That means that you’re always paying the previous month’s interest — so your January payment is partly the principal and partly the interest you owe from December. The day you close on a house, interest begins accruing leading up to your first payment, and you’ll pay that interest in addition to any closing costs prior to beginning your actual monthly payments.
The interest you pay over the life of the mortgage ends up balancing out, so you’ll either pay now or later. But for cash flow’s sake, it might be advantageous to save money on your mortgage upfront, since you’ll be paying a lot in closing costs.
So, if you close on April 28, you’ll only have to pay two days’ worth of interest upfront; you’ll then get to wait till June 1 (since you usually get to skip your first payment) to pay your first mortgage bill, which will include interest for May. Your first mortgage payment will be due on June 1, and will include the interest for May.
You’ll get the most out of your final rent check: One thing that drives buyers crazy is paying rent and mortgage at the same time. By closing on a home as close to the end of your rental agreement as possible, you’ll prevent payment overlap (assuming your lease expires at the end of the month).
If you’re buying an additional property, closing at the end of the month can also keep you from paying twice. If you’re renting one of the homes to a tenant, end-of-month closing can give you extra time to get it occupied.
You’ll get a better deal on home prices: Many sellers want to start the new month with a clean slate and eliminate their extra payments, which could mean lower prices for you. Sellers who are moving, buying another property, tight on cash or threatened with bankruptcy will be motivated to sell their home quickly as the end of the month approaches — even if it means lowering the price.
“Most sellers … look to when the property will close as a driving factor to offer acceptance,” said Andrew Haley, director of asset management at La Jolla, Calif.-based Pontus Capital.
If the seller wants to close as soon as possible and you specify a shorter escrow period, your offer could be the most attractive one — even if it’s not the highest.
This could also be the case for bank-owned homes, particularly if home sales have been low. Banks are businesses just like any other, and if their assets aren’t performing, they might find it necessary to purge all or some of their inventory. What’s more, Haley said, salespeople working for banks or corporations are often driven to meet monthly sales goals for risk of losing commission, regardless of the home price.
He experienced this first-hand as an asset manager for General Motors Acceptance Corporation: “Goals were set on a monthly basis, and not making the goal would cost me thousands of dollars in lost commission,” Haley said. “I was not paid on a percentage of the sale of the property, but on a numeric amount of closings per month regardless of value. I can tell you that at month’s end, I was highly motivated to get the deals done.”
How to meet your end-of-month goal: Simply making your desired closing date known to the seller can help you meet your end-of-the-month goal. “If you don’t set a deadline, it seems that loan officers and escrow and title officers are not overly anxious to get their jobs done,” Haley said. “When the month’s end is coming up, they seem to be on top of things more as they realize the time to close is coming up.”
As you shop for your new home, consider how closing toward the end of the month can also make the transition to life as a homeowner smoother. You might just want to get the whole thing over with as soon as possible.
“I don’t have a full explanation as to why, but there is no doubt a conscious and subconscious motivation to get something done prior to the last day of the month, regardless of it being a real estate transaction or any other goal in life,” Haley said.
Tess Frame writes for GOBankingRates.com, a personal finance news and feature site.