Thursday, April 27, 2017 / by Dustin Dammeyer
One of the decisions you’ll need to make when you make an offer to purchase a home is the closing date. Yes, it goes into the contract and all efforts, from the time the contract is accepted by the seller until you’re handed the keys, are aimed at meeting this date.
If you are the seller, by the way, you should know that the closing date, like many of the contract terms, is negotiable, as long as the buyer’s lender can fund the loan by the chosen date. We have often seen protracted negotiations over closing dates since both the buyer and the seller have a vested interest in this contract clause.
That said, there are several things to consider when choosing a closing date aside from when your lease terminates (if you are currently renting) and the estimated date on which the lender will be ready to fund the loan.
1. Since prepaid interest, which is paid at closing, is prorated from the date you close to the end of the month, you will pay less if you close at the end of the month, a good choice for the cash-strapped homebuyer.
For instance, suppose your loan amount is $300,000 at 6 percent interest and the sale closed on January 10. You will be required to pay for 22 days of interest, or $1,085.04. If you close on the 25th, however, you will only pay six days of interest, or $295.92.
Keep in mind, however, that there are many cash-poor homebuyers, or those that are hoping to hang on to their cash to use to fix up the new home, so there is typically a backlog of closings toward the end of each month.
2. If you’re worried about cash flow, close early in the month. Yes, you’ll pay more in pre-paid interest, as the above example shows, but because interest in paid in arrears, you won’t have a house payment for slightly less than two months. Suppose you close on January 5. The prepaid interest covers you until January 31 and, since interest is charged in arrears, you won’t have a house payment for February until March 1, giving your cash flow some breathing room.
3. Avoid closing during the winter holidays, especially near Christmas and the week before New Year’s Day. Most of the real estate industry closes up shop during this week so the chances of closing on time are diminished. Plus, there’s enough stress around the winter holidays without adding closing on a loan and moving into a new house to the mix.
4. If you want to be able to move in over the weekend, close by at least Wednesday. This gives the title company time to get the deed on record and you’ll have keys in hand in time to move in on Friday or Saturday.
5. If you are also selling a home, consider your existing loan. The interest rate may be higher than that of the new loan so it may be better to choose your closing date based on that fact – close as soon as possible.
By the way, if you’ll be using an FHA-backed loan, you will be expected to pay 30 days of interest regardless of when in the month you close. In this case it may be better to close at the end of the month since you are paying for it anyway.
Tip: The closing date and the occupancy date are not necessarily the same. The date on which you close is the date on which the ownership of the home is transferred to you yet occupancy typically doesn’t take place until after the sale goes on record at the country recorder’s office. This date, like most in the contract, is negotiable. Some sellers allow the buyer to move in prior to closing, but there are insurance issues to consider with this scenario. Then there are the sellers who may need more time to move out and need to “rent back” the home. Ensure you consider all your options when choosing the occupancy date.