Have you heard you can “skip” a payment, or maybe even 2 months payments, when you refinance?
Is this practice considered tricking the system, or getting away with something? No, in fact, you may be front-loading more cash at closing.
This is how it works:
The first thing to understand is how a mortgage payment works. Mortgage payments are paid in arrears, as opposed to rent which is paid in advance. For example, when you make your May rent payment, you are paying to live there in the month of May. However, when you make the May mortgage payment, you are paying the interest accrued in April. The lender cannot charge you May interest until June 1st, after you lived there all of May.
How does this apply to a refinance? Let’s say you are refinancing your home and it will close on June 5th. Your lender will tell you to skip the June payment. Why? Interest will be collected at closing. In this example, you may have 2 choices with regard to interest. The first is that you may receive an interest credit for the first 5 days of June, thereby making your first payment on July 1st. When you make the July 1st payment, you are paying all of June’s interest, which is why you received a credit for the 5 days you did not live in the property at closing. In this instance, you “skip” one month’s payment.
The second is that you can “skip” 2 months payments by making your first mortgage payment on the new loan on August 1st. When you make the August 1st payment, you are paying all of July’s interest. But, at closing, instead of an interest credit for 5 days, you pay all of June’s interest. Thus, you pay more interest at closing. Some borrowers will include this in the loan amount so they do not have to come out-of-pocket at closing.
So, you are not getting away with anything, rather you may be paying more interest at closing if you “skip” 2 months payments, rather than “skipping” one month. In either case, you are paying interest for the time you live in the home.
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