Daily interest charges on a mortgage are confusing. I have heard hundreds of times that people think they should settle at the end of the month to save money on the closing costs. They make it sound like you will save enormous amounts of money by closing at the end of the month. Everyone knows its true. I have clients whose friends tell them this, their neighbors and workmates also tell them. So it must be true, yes? It is not true. This is an old mortgage myth. What these people are talking about is the daily interest charge, also known as per diem interest.
Settle any time of the month that works for you
The actual closing costs are no more expensive if you settle early in the month than if you settle late in the month. What people are talking about is that the daily interest due at settlement will be for more days early in the month than late in the month. You have to pay for the number of days you own the house for the month you settle in.
So if you settle July 28th you’d have 3 days of daily interest due from July 28-31. If you settle July 12th you’d have 19 days of interest due from July 12-31. So people say, “the closing costs are more expensive if you settle early in the month.” But that is false. The settlement date has no impact on the actual closing costs. It only impacts daily interest, which is not a closing cost. Closing costs are fees you pay to execute the transaction. Interest is not a cost to close the loan. You have to pay interest on the loan for each day you own the house.
Waiting is silly
And waiting to settle until the end of the month to save some daily interest is silly. You should settle whenever it is most convenient for you, your calendar, and your family. Of course you also need to consult your lender and make sure they can accommodate your preferred timeline.
By using the logic of people who say to settle late in the month to pay less closing costs (and remember that all you are saving is daily interest), then you should simply never settle. Then you’d incur zero daily interest. This is the cheapest route! You can be a renter forever and avoid the daily interest altogether. I’m being sarcastic of course.
But there comes a point where you have to pay for things in life. And the daily interest charge is minimal. It will not make or break the monies needed at settlement to try and wait until the end of the month. If you are that tight on the cash needed to buy a house that you are looking at trying to shave the amount of daily interest due, then you should not be buying a house. Just settle whenever it’s best for you, and move on with life and the new house, and getting settled. Your calendar and life are more important than a few days of interest.