VA home loans have their own fair share of moving parts starting with the initial loan application through documentation all the way to the closing. It's quite a process sometimes, even for those who have bought or refinanced their home before. Along the way you've certainly received a good amount of advice from well-meaning parties from your brother in law to your VA loan officer. One of the tidbits might concern when you should close your VA loan. The first of the month or toward the last of the month? It does make a difference but it depends primarily on the nature of your VA loan; is the loan for a purchase or a refinance?
The VA Purchase Date
Working with your real estate agent, you found your property, contacted the seller and made an offer. You may have gone back and forth a few times, negotiating the price but the VA sales contract has much more than just the sales price. There's also a date indicated when and where your loan will ultimately close.
Most sales contracts will allow a period covering 30 days before a closing will take place. There are certainly times when a closing needs to take place sooner rather than later but a 30 day closing is typically the standard time frame. This gives the VA lender and other third parties plenty of time to document your loan and obtain a final loan approval.
But the closing date on a VA loan does make a difference regarding how much money you will need to bring to the closing table, and is something to pay attention to. But let's first review how mortgage interest is paid.
Mortgage interest is paid in arrears, meaning when a payment is made on the first of each month, the amount is for the number of days of interest that accrued in the previous month. This is called "per diem" interest. Mortgage payments act in the opposite way from rent. When someone makes a rent payment, it's for the upcoming month. A mortgage payment applies to the previous month.
Now let's look at why the closing date is important. Let's say your close date is for the 20th. You sign your closing papers and the settlement agent will collect your first month's payment and forward it to the new lender. This is called prepaid interest and in this example there will be 10 days of interest collected from the 20th to the 1st (or 11 days if the month has 31 days). For a home loan of $200,000 on a 30 year fixed loan and a 4.50 percent rate, the daily interest charge is about $30 dollars per day. The settlement agent will collect 10 days of interest, or $300.
If you closed on the last day of the month, the settlement agent will collect just one day of interest, or in this example, just $30. In either case, your first month's mortgage payment has been made because mortgage interest paid on the first of the month is for the accrued interest in the prior month.
That's why closing on the last day of the month for a purchase saves you cash at the closing table.
The VA Refinance Purchase Date
With a refinance, you have more control. You're not bound by a sales contract date and can pick and choose where and when you want to hold your closing. And the date matters on a refinance just as with a purchase but for a different reason. When you refinance, you're replacing the existing loan with a new one and there's some motivation to do so. Perhaps you're changing from an adjustable rate loan to a fixed rate loan but if your situation is like most, you're refinancing to a lower rate. And you want that rate sooner rather than later and you should schedule a closing toward the first of the month, the opposite strategy with a purchase.
Remember, your closing agent will collect per diem interest to the first of the following month. With a refinance, your agent will order the payoff from your old lender and the longer you wait, the longer you'll have the higher interest rate. Each day that you delay, you're paying a higher rate when perhaps you don't have to.
The advice here? Set your closing as soon as you reasonably can.