An interesting fact about rent payments versus mortgage payments: when you are renting a property, you pay your rent in advance, but with a mortgage you pay in arrears.
What does this mean to you when you buy a home?
When you’re renting, paying in advance means you’re paying (most likely) on the first of the month for the privilege of remaining in the property for the coming month. In other words, you pay on May 1st for the period of time from May 1st through May 31st.
With a mortgage, however, you actually pay in arrears, meaning for the previous month during which you’ve already occupied the home. That means your May 1 payment actually pays your mortgage for April 1 through April 30.
When is your first mortgage payment?
This factors in most importantly when you are buying a home and figuring out when your first mortgage payment is due. Let’s say you are closing on your home on August 15th. At closing, you will be charged pre-paid interest as part of your closing costs — this will appear as a line item on your closing statement and it will be the daily rate of interest, as calculated by your lender, for August 15th through September 1. In other words, it’s the interest-only part of your mortgage payment for the remainder of the month.
Then, you do not have a mortgage payment the next month. You do pay for September, but because your mortgage payment is paid in arrears, your first payment is October 1 (so it feels as if you’ve essentially had a month off).
Why might this be important to you?
If you are currently renting a home and thinking about buying, the timing of your closing on your new home could be an important factor, especially if you are keeping a close eye on your finances. Your REALTOR® can help you with this timing, especially if you have had a conversation about what your goals are, financially and logistically, with your closing. Depending on how much time you have between hiring your REALTOR® and when your lease ends, you may have a lot of flexibility (we frequently tell our clients: it’s never to early to start talking to a REALTOR®!).
Let me paint a picture for you. Let’s say you are currently paying $1,700 a month in rent, and your lease expires on October 31. You have obtained a mortgage pre-qualification to purchase a home and your mortgage payment, for the type of home and price point you’re considering, will be around $1,350 a month (pretty typical in the metro Atlanta area, because it’s very often more affordable here to own than to rent). You first contact your REALTOR® on June 27th to start talking about purchasing a home and you are eager and want to start looking at homes right away, because your landlord has told you that, if you need to go month-to-month past October 31st, your monthly rent will go up to $1,950 per month.
Here are a few scenarios to think about:
- If you find a home to purchase in July, with a typical 30-day closing timeframe, the seller may expect you to close in August. This would mean your first mortgage payment would not be until October 1st. However, you would still be paying to rent, as well, so you would have one month during which you would pay your rent and your mortgage (for a total of $3,050!). If the house is the perfect house you may consider this as an option, but in most cases, for most buyers, paying double one month is not really all that attractive.
- If you find a home to purchase in July, and if the seller grants you a 60-day closing timeframe (this is likely the longest your lender will allow you to lock your interest rate), then you can close in September. This means your last rent payment will be due October 1st for $1,750 and your first mortgage payment will be de November 1st for $1,350 — no double payment! Great news! (Similarly, if you find a home to purchase in August, with a 30-day timeframe, you could close in September, have your first mortgage payment in November and avoid double payments, as well.)
- HOWEVER, consider this: you find a home in August with a 60-day closing or in September with a 30-day closing, which means your closing takes place in October. You pay your last rent payment on October 1st…but then you don’t have a mortgage payment until December 1st. November is, essentially, a “month off” from any kind of housing payment, a month in which you don’t have to write a check at all.
It’s all about the timing and working with a good REALTOR® and lender. A REALTOR® who takes the time to get to know your unique situation can customize your search, explain the timelines and benchmarks in the transaction, and create a scenario that is right for your real estate goals and finances.
If you have questions about the homebuying process and how we can help you to time it correctly for your circumstances, please call us today at 404-994-2181 or email Maura(at)BuySellLiveAtlanta(dot)com.