So, you want to close at month-end?

It’s a request we get month in, month out. And there are good reasons for it…sometimes. But month-end closings can present problems. So, like most choices in life, balance is critical: the upside has to outweigh the down.

First things first. Why are month-end closings so popular?

For buyers getting new mortgages, the nearer to the end of the month a settlement takes place means less interest paid up front. For example, if closing occurs on March 30, the borrower’s first mortgage payment won’t be until May 1 (which includes interest for April). Consequently, at closing the borrower will have to prepay interest for only two days (March 30 & 31). That’s a good thing.

But suppose closing occurs on April 2. The borrower will have to prepay interest for 29 days (April 2-30). Whoa! That’s a lot more than a measly two days. But consider this: the first mortgage payment won’t be until June 1. So, which is better? Coughing up 29 days interest in advance and putting off your first payment for almost a month more or paying less at closing but starting your mortgage payments a month earlier?

For borrowers squeezed for cash, closing late in the month makes sense. But if cash at closing is not an issue, why jockey for a closing date when title companies and lenders are busiest? It’s no secret that the end of the month is when title companies’ closing schedules get hectic. Which means closings are stacked up hour after hour. In turn, efficiency suffers and the chances of mistakes go up. In fact, if problems do occur, the closing may have to be delayed until the following month. Meaning more up-front money. Not a good thing for borrowers who can’t afford it.

These days, end-of-month (and Friday) closings have another issue to deal with: wire transfers. In Indiana, all funds of $10,000 or more (per person, per lender, etc.) must be sent to the title company by electronic transfer. Often, lenders don’t send funds until all closing requirements are met – in other words, at the closing table. Given that many banks cut off sending wires at 2:00 p.m., afternoon closings probably won’t be funded until the next business day. Sometimes, the next business day is the following Monday – or Tuesday if Monday’s a holiday. And it all goes downhill from there, because if sellers haven’t received their money (and they won’t until funding occurs), most sellers won’t let buyers move in. So, if the buyer has a moving van waiting to unload, the movers will have to cool their heels until funding. Definitely not a good thing.

What do month-end closings mean for sellers? As just mentioned, there’s the downside of waiting for their funds, which can create a domino effect. If the seller intends to use the money from the sale to buy another home later that day, the seller’s purchase will have to be delayed. You don’t even want to think about the consequences if it’s the seller’s last day to close or the seller’s (soon to be buyer’s) new mortgage rate-lock expires. Late funding also means the seller’s outgoing mortgage won’t be paid off as early because the title company can’t wire the payoff until the sale has officially closed, adding extra days of interest and possibly late fees. Worse, if the seller has an FHA mortgage, the cash outlay racks up even faster because FHA charges interest for the whole month regardless of when payment is made. So if the closing is pushed back from the end of March until the first of April, the seller will have to pay all April’s interest (even if closing is on April 1^st). Most sellers won’t be pleased. Some April Fool!

With the first-time homebuyer tax credit deadline looming (June 30, 2010), savvy sellers, buyers, and their brokers won’t want to risk a late June closing. The consequence of losing the tax credit because something went wrong at the last minute would be devastating. This deadline is written in stone, unlike a rate-lock that might be able to be extended. But Uncle Sam doesn’t extend. Either the closing occurs on or before June 30, or the tax credit goes down the drain.

The word to the wise, first-time homebuyer or not, is to plan ahead – and conservatively. Shoot for early or mid-month. Don’t take a chance on saving money and getting the deal closed. And remember, not only will title companies be pulling their hair out end of month, so will lenders. Just as title companies can close only so many sales within a certain period of time (only so many hours in the day), same goes for lenders who can process only so many loans. Because most lenders will be pulling out all the stops, mistakes can be made which may cause delays.

So get your deal closed early and rest easy while the ones who didn’t plan ahead break into a sweat.

- Morrie Erickson