Hi all - my first post. I am buying an apartment and have a question about pre-paid interest due at closing on a 30-year fixed rate mortgage. I can't figure out why I would NOT be getting ripped off by closing at the beginning of the month rather than at the end of the month. The loan officer says I should be indifferent (other than time value of money), but I disagree. Case #1: Suppose I close on... [more]
Hi all - my first post.
I am buying an apartment and have a question about pre-paid interest due at closing on a 30-year fixed rate mortgage. I can't figure out why I would NOT be getting ripped off by closing at the beginning of the month rather than at the end of the month. The loan officer says I should be indifferent (other than time value of money), but I disagree.
Case #1: Suppose I close on March 30th. Then I only need to pay about 1 day of pre-paid interest (for March 31st) at closing, and the first of 360 monthly mortgage payments will be due on May 1st, with the interest portion covering the month of April in arrears.
Case #2: Suppose instead I close on April 1st, only 2 days later. Because it's the beginning of the month, I now need to pay about 30 days of pre-paid interest, for the month of April, on the full loan amount. After that I still owe 360 months of fixed mortgage payment, just that it begins on June 1st instead of May 1st.
So does that mean I have to pay an extra ~29 days of interest on the full balance under Case #2??! On top of the 360 months of mortgage payment which is identical in both cases? That's a big difference...
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Response by khd
almost 16 years ago
Posts: 215
Member since: Feb 2008
Prepaid interest is for the time between when the bank puts your loan in and the time you close, which should only be a day or 2. Once you close, you then start making normal payments. At least that is my understanding. For what its worth, in the "Mortgages for Dummies" book the authors claim you should never close on a Monday because the banks will have to put your money into escrow on Friday, thus you will have to pay 2-3 days prepaid interest rather than 1. They also say you can pay up to 30 days prepaid interest. It seems that once you close, you no longer pay prepaid interest.
Its all very confusing! Please correct me if I'm wrong!
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Response by bystander
almost 16 years ago
Posts: 32
Member since: Feb 2009
epitope - It all makes perfect sense. In case 2 you have delayed repayment of your loan by 29 days, and as a result you pay interest for having the money for that period of time.
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Response by aifamm
almost 16 years ago
Posts: 483
Member since: Sep 2007
You have very little control over closing timing anyway... closings can easily be pushed back.
Paralysis of analysis.
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Response by Pirot
almost 16 years ago
Posts: 52
Member since: Jul 2008
Plus, you can always pay the corresponding amount of principal (i.e., pay the full monthly payment) when you pay the pre-paid interest, and you will "save" one month of payments.
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Response by epitope
almost 16 years ago
Posts: 8
Member since: Jan 2010
Thanks all - as you said I could just prepay an extra month of principal on the first payment date so that the balance would be the same as if I had closed at the end of the month.
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Response by mets2009
almost 16 years ago
Posts: 87
Member since: Oct 2008
That prepaid interest (or interest in advance) is to account for the delay in your first payment. In your first example, your initial payment is due 31 days after you close while in your second example, your first payment is due 61 days after closing. The bank is simply getting interest on money it lent to you so you're not getting ripped off in a legal sense. That said, you're right, you're better off closing as close to the end of the month as possible.
http://www.heraldtribune.com/article/20081116/ARTICLE/811160305
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Prepaid interest is for the time between when the bank puts your loan in and the time you close, which should only be a day or 2. Once you close, you then start making normal payments. At least that is my understanding. For what its worth, in the "Mortgages for Dummies" book the authors claim you should never close on a Monday because the banks will have to put your money into escrow on Friday, thus you will have to pay 2-3 days prepaid interest rather than 1. They also say you can pay up to 30 days prepaid interest. It seems that once you close, you no longer pay prepaid interest.
Its all very confusing! Please correct me if I'm wrong!
epitope - It all makes perfect sense. In case 2 you have delayed repayment of your loan by 29 days, and as a result you pay interest for having the money for that period of time.
You have very little control over closing timing anyway... closings can easily be pushed back.
Paralysis of analysis.
Plus, you can always pay the corresponding amount of principal (i.e., pay the full monthly payment) when you pay the pre-paid interest, and you will "save" one month of payments.
Thanks all - as you said I could just prepay an extra month of principal on the first payment date so that the balance would be the same as if I had closed at the end of the month.
That prepaid interest (or interest in advance) is to account for the delay in your first payment. In your first example, your initial payment is due 31 days after you close while in your second example, your first payment is due 61 days after closing. The bank is simply getting interest on money it lent to you so you're not getting ripped off in a legal sense. That said, you're right, you're better off closing as close to the end of the month as possible.
http://www.heraldtribune.com/article/20081116/ARTICLE/811160305