When you obtain a loan to purchase a home, you’re required to prepay any interest that will accrue from the date of closing until the end of the month. So, in theory, the closer your closing is to the end of the month, the less you have to pay in closing costs.

This portion of interest is charged to the buyer at closing because mortgage payments are made in arrears. Unlike paying a rent, a monthly mortgage payment actually covers the previous month. For example, if you were to purchase a home and close in January, your first mortgage payment would not be due until March 1. The payment on March 1 would cover the principal and interest owed to the lender for the month of February. For a visual illustration, take a look at the sketch above.

Regarding the prepaid interest, assume your actual closing date is January 15th. Your prepaid interest charge is as follows:

Mortgage amount:    $175,000
Annual (fixed) interest rate: 6%
Daily interest charge:    $28.68

Now compare the potential savings in prepaid interest when closing on the 31st vs. 15th.

January 15th → 17 days of interest (17 x $28.68) = $487.56
January 31st → 1 day of interest (1 x $28.68) = $28.68

By closing later in the month it’s possible to reduce your closing costs by hundreds of dollars. However, closing at the end of the month could cost you more than expected if there are any delays prior to closing. For instance, if you initially intend to close on January 31st, but are delayed until February 1st or later, you will be charged interest from closing to the end of February. So instead of paying 1 day ($28.68) of interest you may end up paying for 28 days ($803.04). 

Ultimately, your time-line for moving should determine whether you negotiate to close early or later in the month. While it is possible to save a few hundred dollars in prepaid interest charges by closing later in the month, I recommend closing earlier to avoid the risk of any last minute surprises concerning prepaid interest charges.

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Provided By: CBS

This segment details what’s become of the subprime mortgage market and explains how to avoid financial disaster before shopping for a loan.  

According to Freddie Mac, subprime loans account for 50 percent of current home foreclosures. So, what does this mean for the Texas housing market?

“Dr. Mark Dotzour, chief economist with the Real Estate Center, says the real vulnerability in the residential housing market is in the entry-level housing category in regions where a large percentage of buyers have purchased with little or no down payment.

In recent years, investor thirst for the higher yields of mortgage-backed bonds has allowed mortgage lenders to relax credit standards and issue loans that have a much higher risk of foreclosure,” Dotzour said. “It stands to reason that when you make riskier loans, you are going to have more foreclosures” (Real Estate Center | Texas A&M University, January 2007).

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