When to buy a home – Financially speaking
- The best time of the year to buy a home may depend on your current situation (employment, kids in school, rent expiring).
- Most people prefer to buy a home between April and August or from November to December. However, during this time, since most people are looking to buy, demand is higher which tends to drive prices up.
- During the off-months, there is less demand and therefore prices tend to drop, however, there may be less to choose from.
- As always, interest rates fluctuate throughout the year and this can have an impact of when to buy.
What most people don’t realize is that property tax due dates can cause a buyer to bring more money to closing. For example, if property taxes in XYZ County, GA are due in October and the buyer requires an escrow account, the month of closing may require more money due at closing. Some states allow property taxes to be paid twice a year.
Property taxes of $2400 annually are due in October. Closing date set for August (peak season). First payment in October. It will pay September's principle and interest payment (in arrears). No payments are being made by the buyer to pay for taxes from August to December 31st. Therefore, at closing, the lender may collect 5 months of property taxes (Aug-Dec) from the buyer in addition to 2 extra “cushion” months in case the cost of property taxes increase. Total taxes due at closing = 7 months ($1400).
Property taxes of $2400 annually are due in October. Closing date set for November (non-peak season). First payment is January. Buyer will pay from January to October (10 months). In October, 12 months of property taxes will be due and the buyer paid 10 which means only 2 months will be due. Therefore, the buyer will pay 2 months of escrow + 2 months for cushion at closing = 4 months ($800).
By waiting 3 more months, the buyer saved $600 out of pocket expenses. Lenders working with financially challenged buyers tend to use this practice to the buyer’s advantage.
This tactic is extremely important when refinancing a home loan for a home owner needing to bring funds to closing.
- Up to 2% of the costs due at closing may be coming from property taxes due for escrow.
- When refinancing, the current lender may have an escrow deposit with several months of payments made.
- Some lenders may offer the home owner the ability to offset the pay-off balance by the amount in the escrow deposit.
- Some lenders won’t offset the balance and will simply send the home owner a check in the mail.
- If your current lender offers you a great rate and superior service, then you may want to consider refinancing through them (called streamline refinance) in order to have the escrow money carried over to the new escrow account. This too will save money due at closing.
- The day of the month can also impact the amount of money needed at closing.
- When buying a home, daily interest is collected from the date of closing to the end of the month (including the date of closing). Example: Close date set for August 20th. Interest paid at closing = 12 days because you count the 20th and there are 31 days in August.
- If the closing date is set for the last day of the month, the buyer needs to only pay 1 day of interest. In either case, the buyer’s first payment is October 1st (paid in arrears). The buyer paid for August interest up front at closing and therefore has to pay for September’s interest in October.
What if you could put money in your pocket instead?
- Short pay or Interest Credit is offered by setting the closing date within the first 5 - 10 days of the month. The lender pays the borrower an interest credit for those days. If the buyer closes on the 5th of August, the lender will pay the buyer back 5 days of interest. Since those 5 days are removed from August, the interest is now due for August which is paid in September instead of October. In other words, if you accept an interest credit, your first mortgage payment will be due 1 month sooner (September) than if you don’t do an interest credit (October).
Why would someone go through the trouble of interest credit if they can close on the last day of the month?
- Due to delays in closing loans, sometimes loans cannot be closed on time and need to be pushed into the following month. This is especially true when refinancing a loan which has a 3-day right of rescission period that can push a loan closing into the next month. It’s just good to know that you have an interest credit option if something does push the loan into the following month.
Notes: When refinancing - your payoff is different from your current balance. NEVER stop making mortgage payments even if the Loan Officer tells you to do so when refinancing a loan. When purchasing, find out if the lender offers interest credit. Not all lenders offer this option.