If you’re about to close on a new home, you’ve probably had people tell you to try to schedule it at the end of the month. In fact, there are both pros and cons to this approach. It will save you some cash at closing, but your first mortgage payment will be due in a shorter period of time.
Payments in Arrears
The term “arrears” has a negative connotation, but when you take it in the context of your first mortgage payment, it’s actually a good thing. When you make that first payment, it covers the previous month, just the opposite from renting. When you make a lease payment, you’re paying in advance for the month ahead. This distinction is pivotal to the interest you’ll pay at closing, as well as to when your first payment will come due.
It’s commonly believed that closing late in the month is best because it will cost you less out of pocket. Because that first mortgage payment you’ll eventually make is for the previous month, you must pay accrued interest at closing up until the first day of that month -- the remaining days in the month you close on the property. For example, if you close on September 20, you must pay interest for the period of time from that date until September 30 – 11 days inclusive. If you close on September 10, you’ll pay 21 days’ worth of accrued interest – roughly twice as much. It’s not wrapped into your loan and it doesn’t affect the loan in the long term in any way. You’ll have to write a check for the amount at closing.
When you make your first mortgage payment, that payment will include interest for the 30 days immediately preceding the due date -- from the day first of the previous month. The cash you pay at closing covers the interest up until this point.
The First Payment
If you’re worried about how much cash you must come up with at closing, then closing late in the month is the better deal. But if you’re more concerned with how many days you can go without making that first mortgage payment, closing early in the month is better. Your first mortgage payment can’t come due for at least 30 days after closing and it must be scheduled for the first of the month. If you close on either September 10 or September 20, your first payment would be due November 1 – the next available first day of the month after the 30 days have elapsed. This means that if you close on September 10, your first mortgage payment isn’t due for another 51 days – 20 days for the balance of September, plus October’s 31 days. But if you close on September 20, you’ve got to come up with that first mortgage payment only 41 days after closing.
Another thing to keep in mind is that most mortgages have grace periods, not just for that first mortgage payment but for all of them. It’s usually 15 days – your payment isn’t actually “late” until this time. If you want to calculate your first payment down to the wire, you can tack this on, but you probably won’t want to rely on this month after month. If you get a little tripped up at some point and miss the deadline, you’ll end up with significant late fees and a ding on your credit history.