Refinancing your home is a big decision and requires careful consideration of the mortgage loan program, interest rate, fees and more importantly the longer-term financial goals. Here’s what really happens when you refinance your house and skip a payment…
Mortgage interest is calculated in arrears. In other words, when you make a mortgage payment due on the first of the month you have a 15-day grace period up until the 15th. If you make your payment after the 15th of the month you will incur a late fee, but it will not hurt your credit.
The payment due on the first of the month is for the previous months’ interest. This is the opposite of logical thinking, but then again, some things in the world of mortgage finance don’t make sense. Be that as it may the payment is due on the first of the month, so for example on March 1 that is for all the interest of February. If you’re closing your mortgage say at the end of February, the lender that you make your mortgage payment to (loan servicer) will be paid off and you subsequently would skip the mortgage payment otherwise due in March and the first payment on the new loan would be April 1. However, the interest on April 1 is for all the interest due for March. So technically, you do skip a payment when you refinance, but there is no such thing as a free lunch and the same holds true with mortgage payments.
When you refinance your house and you get the news that your loan has been approved the lender starts charging interest from that day onward. Any interest on the current payoff from your mortgage that you are refinancing is also tacked onto your current principal balance. This is another factor to consider when refinancing. When you refinance your house, your payoff is always higher because of the interest that they tack on to your loan for the estimated time it takes for them to be paid off. If your loan is $400,000 and you’re not closing for another 15 days they’re going to add on another 15 days of interest. This plays a role when you are closing escrow because the amount that’s paid comes off the net itemization on your final settlement statement.
Let’s use the month of March to illustrate how your payments are skipped. If you close between March 1 and March 15th on your new refinance you would not have a mortgage payment to make until May 1.
If you close from the 15th through the end of March you still do not have a mortgage payment to make until May 1 the difference is however, the closer you are to closing at the end of the month the less prepaid interest there is which can affect your net numbers at closing.
If you are thinking about refinancing your mortgage pick an experienced lender who can walk you through the process.
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Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.