Does closing date matter for a refinance?
Homeowners hoping to refinance are often focused on finding the lowest possible interest rate. But many don’t know that their closing date can also have a big impact on costs.
Closing toward the end of the month could help you save thousands in closing costs and prepaid items (if those are required upfront).
But there are risks that come with trying to time your mortgage, too. So make sure you work closely with your loan officer to find the ideal closing date for your situation.
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How your closing date can save you money
As with a home purchase loan, a refinance requires you to pay closing costs. That means you’ll have to prepare to bring cash to your closing on the date it is scheduled.
But you may be on the hook for less money on your closing date if you schedule it carefully, the experts agree.
“There are different benefits to closing at the beginning, middle, and end of the month. But I typically recommend closing at the end of the month. This helps save you money because you will owe the lowest amount of prepaid interest, which means you won’t have to bring as much cash to closing,” says Carter Seuthe, CEO of Credit Summit in Austin, Texas.
Reduce your upfront interest payment
Consider that mortgage interest accrues from the date of your refinance closing to the date of your first mortgage payment. Interest that accrues during this time will be paid upfront at closing.
“If you carefully time your refinance toward the end of the month, you will be required to bring less cash to close. There is a smaller window of accrued interest, requiring less to be paid to your new lender,” agrees Edwin J. Rosales, a loan officer and sales assistant with Mortgage Network.
Say, for instance, you refinance a mortgage loan with a principal of $480,000 at a fixed rate of 3.5%. Your daily accruing mortgage interest be $47.
Next, assume you pick a closing date of March 14, 2022, with a funding date of March 20, 2022. That means 12 days of interest would be due to the new lender and you would owe an additional cost of $560 at closing (12 days x $47 in daily interest).
But if you picked a closing date of March 25 instead, with a new funding date of March 31, zero days of interest would be due to the lender.
Timing affects your first mortgage payment, too
“However, if you choose to close early in the month, even though you will pay a little more prepaid interest you will have almost two full months before you will have to make another mortgage payment,” says Ralph Vitiello, regional vice president of the North East Region for Northpointe Bank in Grand Rapids, Michigan.
Hence, if you close, say, on March 4, you would have over eight weeks before your first payment is due on May 1.
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Saving on upfront taxes and insurance
Jon Meyer, a licensed MLO and loan expert with The Mortgage Reports, explains that another factor could impact your decision about when to schedule a refinance closing.
If you plan to escrow your property taxes and homeowners insurance — meaning they’ll be paid along with your mortgage each month — you’ll have to pay a lump sum toward these costs at closing.
“Depending on where you live and when your homeowners insurance renews, if you must have or elect to have an escrow account that pays your homeowners insurance and property taxes on your behalf, you have to fund the escrow account with a specific amount of months’ worth of both property tax and insurance payments,” he says.
These upfront charges for taxes and insurance are known as ‘prepaid items.’
Reduce your prepaid items
Say you opt to close your refi on December 15. When you close your loan, you’ll skip a month before your first mortgage payment is due, which would then be February 1 of the following year.
“Be aware that some tax payments are scheduled bi-annually, depending on the state in which you live,” Meyer explains.
“In California, for example, property taxes are due in March and November. Your first mortgage payment, in February in this example, will occur right at the end of the second tax payment period. So six months’ worth of taxes — or half of your annual tax bill — would be collected to fund your escrow account and cover this upcoming payment,” Meyer continues.
He gives this example to show how the numbers might break down:
- Home purchase price: $500,000
- Upfront property taxes: $3,125
- Homeowners insurance: $917
- Total cost of prepaid tems: $4,042
“Even though your insurance doesn’t renew until April 1, it would need to be collected at the time you close because you have an escrow account that needs to be pre-funded,” Meyer explains.
Put another way, on top of all your other closing costs, you’d have an additional $4,042 you’d have to pay to fund your escrow account if you closed in December.
Does it make sense to time your closing?
In this example, if you closed in late March of the following year instead, your first mortgage payment would be due in May. That’s just a couple of months after the previous tax bill due date and a month after your insurance renewal.
Because these have both recently been paid, you would have to fund your escrow account with significantly less: three months’ worth of property taxes ($1,562, using the previous example) and three months’ worth of insurance coverage ($250), for a total additional amount due at closing of $1,812.
“However, you may not want to wait a few months to close if it means that mortgage interest rates will rise over that time,” adds Meyer.
Refinancers will receive an escrow refund
For homeowners looking to refinance, prepaid items might be less of an issue.
If you close your refinance right around the time your property taxes are due and your old lender hasn’t already paid them from escrow, you will be required to pay them at closing.
However, you’ll shortly receive a refund from your previous lender reimbursing those charges.
“Any amount of money that remains in your current mortgage loan’s escrow account when you complete the refinance will be provided to you via check from your previous lender within 20 days after closing,” Meyer continues.
That means timing your refinance to reduce prepaid items might not matter as much if you can stomach the upfront charge.
However, if you need to reduce your upfront costs and can’t wait on a reimbursement, timing your refinance correctly could help you afford it.
Verify your refinance eligibility. Start here
What’s the best day to close on a refinance?
The day of the week you opt to close may make a difference, too.
“Your refinance closing date can save you money if you choose to do it preferably on the last business day of the month, unless it falls on a Monday,” explains Cliff Auerswald, president of All Reverse Mortgage in Orange, California. “If it falls on a Monday, you want to close it on the preceding Friday so that you won’t have to pay interest over that weekend.”
When should you lock in a refinance rate?
The best time to lock in a refinance rate will depend on your situation and tolerance for risk.
You may want to wait things out a bit in the hopes that rates drop, but there’s a significant risk that they will rise over that time instead.
Alternatively, you could lock in a rate now with a float-down provision that offers the option to decrease the rate if market interest rates drop during your lock period.
“Overall, if there is a tangible net benefit to refinancing, I believe it’s best to lock in without waiting because the market can be very difficult to predict.” —Ralph Vitiello, Regional VP, Northpointe BanMichigan.
“There is no ‘one-size-fits-all’ approach to locking rates. Some factors to assess are the current interest rate market and your financial situation, and whether or not the quoted interest rate meets the goals of your refinance,” Rosales suggests.
“Risk-takers may prefer to wait and monitor the market throughout the refinance process and then secure an interest rate as they get closer to closing. Others would prefer to lock in early, prepare their budget, and know what to expect once the loan is closed and funded,” he continues.
Note that mortgage rates hinge greatly on the bond market.
“Watching that closely can help provide insight as to when a good time to lock would be,” Vitiello recommends. However, he also notes that “overall, if there is a tangible net benefit to refinancing, I believe it’s best to lock in without waiting because the market can be very difficult to predict.”
Advice on timing your refinance closing
As detailed earlier, there are pros and cons to trying to time your refinance closing. If you schedule the date for the end of the month, you’ll pay less in accrued mortgage interest. But if you slate your date for earlier in the month, you’ll have more time before your first new mortgage payment will be due.
And, if you have an escrow account, timing your closing carefully can be important if you want to avoid having to pay a large lump sum in property taxes and homeowners insurance at closing.
There’s also the risk that, if you aim to delay your closing too long, mortgage interest rates will rise (if you’ve not already locked in a rate). Or, after locking in and scheduling your closing, you may later learn that rates have dropped, which can lead to borrower’s remorse.
“There is no ‘perfect time’ for each person across the board, so realize that there will be pros and cons to each refinance closing time,” adds Seuthe.
Carefully assess your situation and work with your loan officer to find the best rate and closing date for you.
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