If we close on the 11th, “prepaids and reserves” is about $1700.
If we close on the 31st, it’s a much smaller amount. (Along the lines of zero.)
I understand the basic concept–these are pro-rated interest, taxes, and things like that. In that sense, they don’t ultimately make a difference. But I’m not getting a clear picture of when “ultimately” happens. Does it all end up cancelling out during the first month of the mortgage? Or over the entire life of the mortgage? Or during the last month of the mortgage?
Sorry, am I understanding correctly (after some further reading) that given closing date X, on that date you pay for the taxes etc that would be owed for X through 31-X, and then you DON’T pay a mortgage payment (or taxes etc) again until the first of, not the first month beginning after X, but the SECOND month beginning after X?
That’s what this seems to be saying (see esp. bolded portions):
In cashflow terms, this feels like you get a discounted month if you close on (for example) the first. All you’ll have to pay for that month is taxes etc. Then you don’t have to pay ANYTHING for about 60 days. That can’t be right. But the above seems to imply it.
ETA: To expand… you pay interest on your account balance at the end of the month prior to your payment being due. If you close on Jan 15, you could theoretically set things up to have your interest payment due on Feb 1 but since it would be awkward to calculate interest for half a month, they just add it to your closing costs. Then the interest you accrue in February is paid in your March payment.
Keep in mind this is separate from the property taxes and home owners insurance that may be collected to fund your escrow at closing. That will be roughly the same regardless.
I don’t want to flood the board with threads about me trying to buy a house so I will just ask a related question here.
We’re nearing the act of signing an offer. It’s a little frustrating to me, though, that we don’t seem to be able to know the exact numbers we will be paying until after we’ve signed this thing that commits us to buy. (Once we’ve signed it, says our lender, then they can go in and ascertain the specifics concerning what have heretofore been estimates).
Is this how it always is? Our lender has been really good, not pressuring us (in fact, consistently cautioning us in a conservative direction) and is very good at communicating complicated matters to us and so on. I don’t think she’s trying to take advantage of anything. But is it, in fact, generally true that you don’t really know the exact amount you’re going to be paying, taking all fees etc into account, until after you’ve put in an offer?
Seems odd. It’s led me to misunderstand how much I can offer twice in two days.
I don’t see any provision for backing out if it just turns out somehow the numbers came in much higher than we were expecting based on the estimated amounts that have been shown to us so far.
Maybe I’m misunderstanding where you are in the process then. Are you getting information from a lender, like a pre-qual, so you know how much house you can afford? In that case, yes, your closing costs and mortgage terms may vary considerably depending on your actual purchase price.
Frylock, let me address the interest question first. It’s late and i’m really tired, so I’ll answer all the rest of this tomorrow, ok? Or maybe I’ll PM you tomorrow…Anyway…
Here’s mortgage/loan 101.
Interest is due starting the day you close on the loan. You will continue to pay interest until you pay off the loan by either selling the house or paying off the loan.
Your monthly mortgage payments are made up of different parts: the principal payment (what you are paying on the balance of the loan), interest, and usually property taxes, hazard (homeowner’s) insurance, and mortgage insurance if your loan requires it. Right now, let’s just talk about the principal and interest part, OK?
Whenever you make a payment, you are paying principal due for that month and interest due for the prior month. This is because interest is dependent upon the passage of time, so the time (in this case a month) has to pass before the interest is due. So let’s use an example. You make a payment in March. In that payment, you are paying the principal due for March and the interest due from the month of February.
Let’s test you now. You make a payment in April. In that payment, you are paying the principal due for the month of ___________ and the interest due for the month of ________.
April, March
Your first loan payment is due on the first day of the month following the month after you close. Clear as mud? You close in January. Your first payment is due March 1. In that March 1 payment, you will be paying principal due for the month of ____ and interest due for the month of _______.
March, February Didn’t expect another test, did ya?
Go back and read #1. It says that interest is due on the loan starting with the day you close. So again you close in January. You owe interest starting with the day in January that you close until the end of January. (February’s interest will be paid in your March payment.) January has 31 days. If you close Jan 31, you owe 1 day of interest for the month of January. If you close on Jan 30, you owe 2 days of interest. Jan 29, you owe 3 days, and so on.
The mortgage company doesn’t want to add this interest to your first (in this case March) payment, so they collect it at closing. This is why you may hear people advising you to close as close to the end of a month as possible, to keep this out-of-your-pocket amount as low as possible. This amount is called “prepaid interest” and will show up on the 2nd page of your HUD-1 settlement statement.
The mortgage company is required to disclose this amount to you up front, within 3 days of your official loan application and before you lock in your loan rate. Since the mortgage company isn’t psychic and can’t predict your closing date (or require a specific date in order to approve your loan as long as it is within the lock-in period) they will give you a broad estimate. Look at the estimate your mortgage company gave you. You will probably see that they estimated 15 or 16 days’ worth of prepaid interest. They’re allowed to do this. Just figure out the daily amount and calculate a better estimate based on the closing date in your purchase contract. If you are using a buyer’s agent, most states I’m aware of require the agent to give you a similar closing cost estimate before you sign a purchase offer (notice I said “offer,” which is not legally enforceable, and not “contract,” which is.) These amounts can vary between what your lender gives you and what your agent gives you. A good lender and a good agent will be willing to answer any questions you have about the amounts and explain them until they make sense to you. They should also be willing to refine the estimates as they have more detailed information.
OK, that’s all for now. I’m exhausted and am going to bed. I’ll post more for you tomorrow. I hope this has helped you so far.
The typical variation between the estimate and the final is on the order of 1% of the total. And as has already been discussed, some of it is just timing, where depending on which date you actually close, more or less money will be paid at closing versus at when your first mortgage payment is due (anywhere between 30 and 60 days later).
So the bottom line idea is when you make an offer you understand that your cash at closing will be about X plus or minus a few hundred and your monthly payment will be about Y plus or minus about $20.
In any case, if you’re offering $200K for the house, $200K is what you’re paying for the house. All the flex is in the ancillary details of fees, taxes, timing, etc.
If you’re buying so much house that those small uncertainties might sink you, well you’re screwing up. You’re going to have a surprise cost, say a failed washing machine, and that’ll be a bigger burden than if the monthly payment comes out $10 higher than you expected.
As well, even with a fixed-rate mortgage your monthly payment changes every year. Taxes and insurance pretty much only go up every year, and your payment changes to accommodate that. So all those pre-closing estimates are only meaningful for 1 year of your 30 year mortgage anyhow.
Bottom line: Relax. Don’t overbuy, but don’t sweat $50 here or there in a $200K transaction. Yes, try to minimize paying junk fees.