By guest blogger Jamie Cailor
We all have probably heard that it is better to close Las Vegas real estate transactions at the end of the month as opposed to mid-month or early on in the month. In fact, many borrowers are under the mistaken impression that they can save money on interest if they close later in the month.
Closings are more often scheduled for the end of the month than any other time for two reasons:
1. An offer to close by month end is more attractive to the seller as it “saves him” having to pay another mortgage payment out of pocket.
2. From the buyer’s perspective, it reduces the amount of cash needed to close in prepaid interest.
In realty, no one is actually saving any money. Las Vegas mortgage interest is paid in arrears – in other words, after you have used the money. The seller will still owe the interest from the previous month, but instead of writing a check, the amount will be deducted from his proceeds. The buyer will still be paying the interest for every day he has the loan, he just doesn’t need as much money up front. So total cost is not so much the issue as having the out of pocket cash to meet the requirements to close.
What is prepaid interest anyway? Well, prepaid interest is essentially the amount of interest due at closing to cover the period of time in the month between the date the mortgage lender closes your loan and the date your first payment is due. Say you close your loan on October 1st, paying 30 days of prepaid interest at closing. While you’ll have to pay that interest upfront, your first mortgage payment won’t be due until December 1st.
However, if you close on October 30th, and pay only one day of prepaid interest, your first mortgage payment will be due December 1st, so that first full mortgage payment will come due sooner. Either way the same amount of interest will be paid - it’s just a matter of when you pay it. But the difference in closing costs can be significant for first time home buyers strapped for cash to get into their new Las Vegas homes. So many homeowners opt to close at the end of the month to reduce their upfront closing costs.
Smart mortgage brokers will typically disclose enough prepaid interest for 15 days or more on the Good Faith Estimate to ensure borrowers have enough money to cover the costs no matter what day the loan actually closes. It’s not always easy to time a closing as “life happens,” so it’s better to overestimate, especially if you’re cutting it close with limited funds. The last thing a borrower needs is to be short on funds at the tail-end of the funding process.
And there are definite disadvantages to closing at the end of the month too. This is always a frantic time for title, escrow companies and lenders, as more than 60% of all contracts are written to close between the 25th and the 31st of each month. But there is NO guarantee that the loan will actually close at that time, and you may be out the prepaid interest anyway. Too many things can happen that delay an escrow. The homeowner’s association doesn’t submit the payoffs for the previous owner in a timely manner, the underwriter asks for more conditions at the last minute, there are mistakes on the final loan documents that need to be corrected, a Las Vegas foreclosure property might not receive final HUD signoff, the title company finds a lien or judgment has just been filed… The list can go on and on. In addition to that, other service providers, like moving companies, rental trucks and even utility companies are also jammed at the end of each month, and you may find it difficult to get the services you need.
On the other hand, if you plan your funds in advance and can close early in the month or mid-month, you’ll have a lot more time devoted to your loan documents and closing packages and it may be cheaper to rent that moving van. Plus even if something happens at the last minute that could cause a delay, the escrow officers and lenders will have more time to expedite your transaction as much as humanly possible.
All that said, perhaps you shouldn’t be looking at Las Vegas homes for sale if the amount of prepaid interest can make or break you. So be sure you have sufficient funds regardless of whenever you close your loan.