Timing Your Home Purchase with Your Rental Lease End
Especially for first time homebuyers, aligning the purchase of your new home with an expiring lease agreement can seem difficult to plan. Planning for the timing of your first mortgage payment can give you an idea of an appropriate time to engage a real estate professional – hint: 1 month prior to your lease expiring is TOO LATE!
By working backwards from the end of your lease, you should allow at least 3 months to engage with a mortgage professional and begin planning for your purchase. In addition, many leases require that you provide 60-90 days’ notice of non-renewal. Being ahead of the curve for timing and planning can save you a lot of worry and headache in trying to time your transition into home ownership.
The Timing of Your First Mortgage Payment
Rental payments are paid in advance for the upcoming month. By contrast, mortgage payments are made in arrears (payments that are to be made at the end of a period) for the previous month. Because of this, you do not have a mortgage payment due during the month immediately following your closing.
For example: if you closed on a home on May 10th, your first mortgage payment would be due on July 1st. This “gap” month can help prospective buyers who may be trying to coordinate between the end of their rental lease and the purchase of a new home.
On average, it takes 30 days or more to find and go under contract on a home. Additionally, it takes another 30 days to go through the process of closing on a home (inspection, appraisal, etc.). If you are considering home ownership and have an apartment lease ending in July, August, or September, now is really the time to start engaging a mortgage professional and realtor. Home buyers #1 regret is not starting the process sooner!
The Significance of the Date You Close
If the timing works for you, another helpful tip is coordinating the day of the month that you close on your purchase. This can impact the dollar amount that is due when buying your new home. At closing, you will owe daily accrued interest from the date you take control of the home through the end of the month. Closing early in the month would allow more time before your first mortgage payment is due. However, it would also require you to pay for more day’s interest accrued.
- Mortgage Amount: $250,000
- Interest Rate: 4%
- Daily Interest Accrued ($250,000 x 4%) x (1/360) = $27.78
- Closing May 1, prepay 31 days of interest = $861.18
- Closing May 16, prepay 16 days of interest = $444.48
- Closing May 30, prepay 2 days of interest = $55.56
Thus, closing later in the month may carry certain benefits for borrowers who are seeking to limit cash out-of-pocket. In the example above, closing May 30 reduces the prepaid daily interest due by nearly $806.
Rule of Thumb – start engaging real estate professionals as early as you can!