Westcoe Realtors, Riverside California…Obviously, for every closed real estate transaction, there is a buyer and a seller. Pretty astute, eh? However, we thought today we would deal with a situation that comes up on every sale, and one that almost always initially confuses a buyer…and that is realization that a house payment works exactly the opposite of a rent payment…which affects your closing costs when you buy, and then later when you sell.
This difference is called “interest in arrears”, and allow us to explain.
In it’s simplest terms, when you rent a property, you pay up front for the right to occupy the home for another month…when you buy a property, the bank cannot charge you interest on the money they lent you (essentially, your house payment), until after you have used the money.
So for a rental, you pay and then use…for a purchase, you use and then pay.
As an example, in a rental, your January 1 payment is for the month of January, and allows you to use (occupy) the home for another month…and then you do it again for February, etc.
When you own a home, your January 1 payment is essentially for the month of December, because you used the banks money for December, and they can now charge you interest, which is calculated into your January 1 payment. Remember…use and then pay…use and then pay.
So now let us break this down for you when you purchase a home, and then again when you sell the home.
When you purchase a home, let us say that you close escrow on the 15th of the month, and your payments will be due on the 1st of every month. Here is what happens. In all of your closing costs, one of them will be 15 days “prepaid interest”, which is the interest you would owe on the loan for the next 15 days. This is the only time a lender can charge you interest ahead of time. This 15 days of interest gets you to the 1st of the next month, and then the clock starts as described above for your payments.
As an example, if you closed escrow on June 15, then there would be 15 days interest on your loan included in your closing costs. This covers you to July 1. Then when the clock started on July 1, your first house payment wouldn’t be due until August 1. In essence, you would have 45 days from the close of escrow before you make your first house payment.
Pretty cool…but what happens when you sell your home?
Well, now you have to “catch-up”. Take the example above, where now when you close on June 15, you are the seller, not the buyer. In this case, you make your regular June 1st payment (remember, it is the opposite of rent, so your June 1 payment covers from May 1-May 30) and then you will be charged 15 days of interest by your lender at close of escrow…this 15 days covering from June 1 until the close date of June 15.
In the end, we understand that this can at first be a little confusing, so always try to remember the simple way we explained it above…When renting, you PAY AND THEN USE…when owning a home, YOU USE AND THEN PAY.
This seems to help all our clients, and hopefully will work for you too. Take care, and thanks for reading.