Mortgage

The very best day to finish a mortgage refinance

Does the Closing Date Matter for a Refinance?

Homeowners hoping to refinance often focus on finding the lowest interest rate possible. But what many don't realize is that their graduation date can also have a big impact on costs.

Closing late in the month could help you save thousands on closing costs and prepaid items (if required upfront).

But there are also risks when trying to terminate your mortgage. So make sure you work closely with your loan officer to find the ideal closing date for your situation.

Check your refinancing eligibility. Start here (02/09/2022)

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How your graduation date can save you money

As with a home loan, a refinance requires you to pay closing costs. That means preparing to bring cash to your degree on the scheduled date.

But you can be hooked on your graduation date for less if you plan it carefully, experts agree.

“Closing at the beginning, middle and end of the month has different advantages. But I usually recommend closing at the end of the month. This helps you save money because you owe the lowest amount of prepaid interest, meaning you don't have as much cash to close," said Carter Seuthe, CEO of Credit Summit in Austin, Texas.

Reduce your interest prepayment

Note that mortgage interest accrues from the date you close your refinance through the date you make your first mortgage payment. Interest accrued during this period will be prepaid at closing.

“If you plan your refinance carefully towards the end of the month, you'll have less cash to close. There's a smaller accrued interest window, so there's less to pay to your new lender,” agrees Edwin J. Rosales, loan officer and sales assistant at Mortgage Network.

Suppose you refinance a mortgage loan with a principal amount of $480,000 at a fixed rate of 3.5%. Your mortgage interest accruing daily is $47.

Next, assume you choose March 14, 2022 as your closing date with a funding date of March 20, 2022. This means that the new lender would be due 12 days of interest and at closing (12 days x $47 in daily interest) .

But if you chose a March 25 closing date instead, the lender would be entitled to zero days interest on a March 31 new funding date.

Timing also affects your first mortgage payment

"However, if you close early in the month, you have almost two full months before you have to make another mortgage payment, even though you pay a bit more prepayment interest," says Ralph Vitiello, Northeast Regional Vice President for Northpointe Bank in Grand Rapids. Michigan.

So, for example, if you close on March 4th, you would have over eight weeks before your first payment is due on May 1st.

Check your refinancing eligibility. Start here (02/09/2022)

Save up front on taxes and insurance

Jon Meyer, a licensed MLO and credit professional at The Mortgage Reports, explains that another factor could influence your decision about when to schedule a refinance deal.

If you plan on filing your property taxes and homeowners insurance — which means paying them every month along with your mortgage — you'll have to pay a lump sum for those costs at closing.

"Depending on where you live and when your home insurance renews, if you have or must choose to have an escrow account that pays your home insurance and property taxes on your behalf, you will need to fund the escrow account for a certain number of months. Worth both property tax and insurance payments,” he says.

These prepayments for taxes and insurance are referred to as "Prepaid Items."

Reduce your prepaid items

Suppose you decide to close your refi on December 15th. When you close your loan, you skip a month before your first mortgage payment is due, which would be February 1 of the following year.

"Note that some tax payments are scheduled semi-annually depending on the state you live in," explains Meyer.

“In California, for example, property taxes are due in March and November. Your first mortgage payment, in February in this example, is made 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 to 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 Tax: $3,125 Homeowners Insurance: $917Total cost for prepaid appointments: $4,042

"Even though your insurance doesn't renew until April 1, it would have to be collected at the time of closing because you have an escrow account that needs to be pre-funded," explains Meyer.

Put another way, on top of all your other closing costs, you would have to pay an additional $4,042 to fund your escrow if you were to close in December.

Does it make sense to time your graduation?

In this example, if instead you closed at the end of March the following year, your first mortgage payment would be due in May. That's just a few months after the previous tax bill due date and a month after your renewal.

Since those two were recently paid, you would need to fund your escrow with significantly less: three months' worth of property taxes ($1,562 in the previous example) and three months' worth of insurance coverage ($250) total additional amount due at closing, in the amount of $1,812.

"However, you might not want to wait a few months to close if that means mortgage rates will go up during that time," Meyer adds.

Refinancers receive an escrow refund

For homeowners looking to refinance, prepaid items may be less of a problem.

If you close your refinance around the time your property taxes are due and your old lender hasn't already paid it out of escrow, you will have to pay it at close.

However, you will shortly receive a refund from your previous lender who refunds these charges.

"Any amount of money remaining in escrow on your current mortgage loan after the refinance is closed will be made available to you by check from your previous lender within 20 days of the close," Meyer continues.

That means timing your refinance to reduce prepaid items may not matter as much if you can handle the upfront payment.

However, if you need to reduce your upfront costs and can't wait for a refund, timing your refinance can help you afford it.

Check your refinancing eligibility. Start here (02/09/2022)

What's the best day to complete a refinance?

The day of the week you choose to close can also make a difference.

"Your refinance close date can save you money if you do it preferably on the last business day of the month, unless it's a Monday," said Cliff Auerswald, president of All Reverse Mortgage in Orange, California. "If it falls on a Monday, you want to close it the previous Friday so you don't have to pay interest that weekend."

When should you set a refinancing rate?

The best time to set a refinancing rate depends on your situation and risk tolerance.

You might want to wait things out a bit in the hope that rates will fall, but there is a significant risk that they will rise during this period instead.

Alternatively, you could now set an interest rate with a float-down clause, which offers the option to lower the interest rate if market rates fall during your lock-up period.

"When the refinance yields a tangible net benefit, I think it's best to log in without waiting as the market can be very difficult to predict." -Ralph Vitiello, Region Vice President, Northpointe Ban, Michigan.

"There is no 'one-size-fits-all' approach to lockdown rates. Some factors to evaluate are the current interest rate market and your financial situation and whether or not the quoted interest rate meets the goals of your refinance,” suggests Rosales.

“Risk takers may prefer to wait and watch the market throughout the refinancing process and then lock in a rate as they near closure. Others would prefer to get in early, prepare their budget, and know what to expect once the loan is completed and funded,” he continues.

Note that mortgage rates are highly dependent on the bond market.

"Watching closely can help provide insight into when would be a good time to ban," Vitiello recommends. However, he also notes that "overall, if there is a tangible net benefit of refinancing, I believe it's best to lock in without waiting as the market can be very difficult to predict."

Advice on the timing of your refinancing close

As mentioned earlier, there are pros and cons to trying to time your refinance close. If you set the date at the end of the month, you will pay less mortgage interest. But scheduling your appointment earlier in the month gives you more time before your first new mortgage payment is due.

And if you have an escrow account, it can be important to plan your closing carefully if you want to avoid having to pay a large lump sum in property taxes and homeowners insurance when you close.

There's also the risk of mortgage rates going up if you decide to delay your deal for too long (unless you've already set a rate). Or, after you've completed and planned your deal, you may later learn that interest rates have fallen, which could lead to borrower remorse.

"There's no such thing as a 'perfect time' for every person across the board, so be aware that there will be pros and cons to every refinance deal," adds Seuthe.

Evaluate your situation carefully and work with your loan officer to find the best interest rate and closing date for you.

Show me today's prices (February 9, 2022)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for the products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policies or position of Full Beaker, its officers, parent companies or affiliates.

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