Also found in: Acronyms.
The date on which the seller delivers the deed to the buyer and the buyer pays the agreed-upon consideration.Purchase contracts typically specify a closing date no later than a certain number of days or no later than a certain date.If closing does not take place on or before the designated date, then the party causing the delay is in default. As a practical matter, unless the contract recites specifically that “time is of the essence,” then closing may usually be delayed several days without penalty or loss.In a seller's market,however,the better practice is to ensure that closing takes place by the agreed-upon date,or the buyer will risk loss of the property and sale to someone else.
The date on which the closing occurs.
On a purchase transaction, there is no financial advantage to the buyer/borrower in closing on any day of the month, as compared to any other day. Buyers should select the closing date as close as possible to the moving date, regardless of the day of the month that is.
The interest clock on the loan starts ticking on the closing date, because the lender expects to be paid beginning the day the funds are disbursed. There is no point in paying interest before you are prepared to move.
While borrowers pay interest beginning the closing date, they may pay it in different ways, depending on when during the month they close. The first payment on a home loan is due on the first day of a month and includes interest for a full month. Since loans may close anytime within the month, there is always an interest adjustment at closing based on the exact closing date. This is Per Diem Interest or “prepaid interest.”
If you close on July 29, for example, you pay three days of interest at closing, covering July 30, 31, and August 1. Your first monthly payment is due September 1. So at closing you pay interest for the last three days of July and the first monthly payment on September 1 pays the interest for the full month of August.
Closing on different days during the month will shift the amount of interest you pay at closing, but will not affect the total interest you pay beginning at closing.
In principle, refinancing should work in the same way as a purchase. If you close a refinance on July 29, you should pay the new
lender per diem interest for three days and the old lender for 29 days. Unfortunately, because of glitches in the system, it doesn't
work out that way. Borrowers often are charged interest by both lenders for one day and sometimes two or three or more.
The major reason is that the funds don't move directly from the new lender to the old lender. The funds are held by an intermediary until the new documents have been recorded, and that process takes time. Because recording offices are usually closed on the weekend, borrowers who close on a Friday are especially likely to pay double interest for several days. So don't close a refinance on a Friday if you can avoid it.
Furthermore, FHA requires that interest be paid for a full month, regardless of when a loan is closed during the month. Those refi-
nancing out of FHA, therefore, should try to close as near to the end of the month as possible.