You Don’t Really “Skip” A Mortgage Payment When You Refinance

Mortgage Rates Nearing All-Time Lows. Again.

Mortgage interest rates are at historic lows, and there may never be a better time to refinance.

It’s hard to imagine rates going any lower than the 3 percent range in which the are currently. However, it’s easy to imagine that, at the first signs of a real economic recovery or inflation, interest rates will climb sharply.

Today’s mortgage rates are near their lowest point since May 2013.

For prospective home buyers, declining rates have meant roughly a ten percent increase to affordability as compared to 2014. You can now afford to purchase more home, or the home at which you were looking has become less expensive.

For current homeowners who haven’t refinanced in the past 24 months or so, there may still be time. Not only is it easier to qualify for a refinance, the savings could be hundreds per month and thousands per year.

What Is A Mortgage Refinance?

A mortgage refinance is the process of replacing your current mortgage with a new one. The steps are straight-forward and can be handled by any licensed bank or broker — your current mortgage lender or otherwise.

There are three different types of refinance loans.

Rate-and-term refinance loans are the most common of the refinance types. In a rate-and-term refinance, the homeowner lowers its interest rate, shortens its loan term, or does a combination of both.

The cash-out refinances is the second-most common refinance type.

With a cash-out refinance, the homeowner can convert its home equity into cash. The “cash” of a cash-out refinance is handed to the homeowner at closing, and can be used for savings, debt consolidation, home improvement, or anything else.

The third refinance type is the cash-in refinance.

In a cash-in refinance transaction, the homeowner brings cash to the closing in order to reduce the total amount owed. Generally, a cash-in refinance is used to reduce loan-to-value (LTV) which can help a homeowner get access to a lower mortgage interest rates.

Cash-in refinances can also be used to remove private mortgage insurance (PMI) from a loan.

What Documents Are Required To Refinance?

When you refinance your mortgage, you are replacing your existing home loan with a new one. Because the loan is “new”, then, banks make many of the same verifications they made at the time of purchase.

There are several notable exceptions to this rule — for example, the FHA Streamline Refinance and VA Streamline Refinance required neither a verification of employment nor of income — but for most new loans, an update to your verifications is required.

Mortgage refinance approvals are based on three basic “ingredients”, which have come to be known as the 3 C’s of underwriting. They are Capacity, Credit, and Collateral.

  • Capacity : Does the borrower have the means and resources to pay off their debts, especially the new mortgage debt?
  • Credit : Does the borrower have a good re-payment history or credit history?
  • Collateral : What is the value and type of the property being financed?

The good news is that the documentation for a refinance loan is typically less as compared to a comparable purchase loan. Borrowers should expect to provide proof of income, documentation of assets, evidence of citizenship or residency status.

Overall, though, total paperwork required is less.

“HELP! My Mortgage Payoff Balance Is Higher Than My Amount Owed!”

As part of the mortgage refinance, your soon-to-be lender will request a “mortgage payoff” from your existing one. Your “mortgage payoff” is the amount required to pay your loan in full, and to satisfy the terms of your current mortgage loan.

Whether you are refinancing with your current mortgage lender or a new one, the payoff is required; and mortgage payoff are among the most misunderstood components of a refinance.

It’s common for borrowers to confuse their current mortgage balance as shown on a recent statement with their mortgage loan payoff.

These are two different figures. The mortgage payoff amount will almost always be higher amount than the balance listed on a monthly statement. This is because the statement shows your balance from some point in time, and the payoff reflects that amount known plus interest.

Remember: Every day you borrow money from a bank, you incur charges for interest. If today is the 15th of the month, then, your mortgage payoff would include 15 days of mortgage interest which have accrued since your statement was last published.

In addition, your mortgage payoff amount may include other fees incurred but not yet paid such as escrow account deficiencies and processing costs charged by your lender.

The items most commonly found on a mortgage payoff statement are:

  1. Principal balance of existing loan being paid off
  2. Interest to be paid through the payoff date
  3. Per diem / daily interest charges for the rest of the month
  4. Payoff statement fee
  5. Any escrow shortage/overage

The responsibility of requesting a mortgage payoff falls to your soon-to-be mortgage lender. You may request a copy of the payoff letter in order to review it for errors; or, to be better prepared for your closing.

You Don’t Really “Skip A Payment”

There are two fundamental truths with a refinance loan:

  1. Your mortgage payoff will include “extra days” of mortgage interest
  2. Your new mortgage payments won’t start until after you’ve accrued a month’s worth of interest

Put these two items together, and it can appear as if you’re “skipping” payments when you make a refinance. Rest assured, you’re not skipping anything — you pay interest to the bank for every day you borrow against your home.

Here’s how it works.

Assume your refinance loan closes on February 15. You will have made a mortgage payment for January already, and the 15 days of interest for February will be added to your payoff. Then, at closing, your new lender will collect the remaining daily interest charges for the month.

At the time of closing, then, your February payment will have been made-in-full.

Now, you won’t make a mortgage payment March 1 because that interest, which is typically collected in arrears, was already collected at the time of your closing.

Then, your “normal” mortgage payments resume April 1.

No months were skipped and no days, even. You paid mortgage interest for every day you borrowed to live in the house, which was all of them.


Realtor with Greg Garrett Realty, actively licensed in the state of Virginia

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