Do You Skip a Mortgage Payment When You Refinance?
When you are in the process of refinancing your mortgage, you may come across refinance advertisements offering the chance to skip a mortgage payment for one month. If it seems too good to be true, that’s because it probably is. In reality, while it may feel like you’re keeping money in your pocket, you’re actually not.
Below, we discuss what you need to know about “skipping” a mortgage payment when refinancing.
- Do you actually skip a mortgage payment when refinancing?
- Why it appears you skip a mortgage payment when refinancing
- ‘Skipping’ a mortgage payment vs. mortgage forbearance
- 4 tips to find the best mortgage refinance offer
- The bottom line
When you refinance, do you actually skip a payment?
Can you skip a mortgage payment? Not really, although it may seem like you’re doing so. That’s because when refinancing your mortgage, you typically don’t make a standard mortgage payment on the first of the month immediately after your closing — instead, your first payment is due the following month.
For example, if you closed on Oct. 15, you wouldn’t make a mortgage payment until Dec. 1, so it seems like you’re skipping the November payment. However, you’re still on the hook for what’s owed for the remainder of October, just in a different way.
“At closing, the lender collects interest from the day of funding to the end of the month,” said Michael Becker, a branch manager with Sierra Pacific Mortgage in Lutherville, Md.
In other words, you cover what’s owed for October (which would have been paid Nov. 1 if you were keeping your existing loan) at the closing table — unless you’re rolling the closing costs into your new loan, of course.
Why it appears you skip a mortgage payment when refinancing
Many borrowers believe they’re skipping an entire mortgage payment because there’s no balance due for the month right after they refinance. But in reality, they’re just paying for that month later on.
Mortgage payments are made in arrears, which means you’re paying for the previous month, rather than the month ahead, when you make payments.
Take the example above, of an Oct. 15 refinance closing. You would have paid the interest owed for September when you made your Oct. 1 payment to your previous mortgage lender. Your previous lender would also be paid for the interest accrued during the first 15 days of October in the payoff amount your new lender sends them.
Your new lender will also charge you prepaid interest at closing to cover the interest owed for Oct. 15 through Oct. 31, which is why you don’t actually go through the process of submitting a payment in November. And when Dec. 1 rolls around, you make your first monthly payment on the refinanced mortgage to cover what’s owed for November.
Why companies advertise skipping mortgage payments
As explained earlier, there are nuances associated with refinancing your mortgage and when your first payment is due.
Perhaps that’s why some companies advertise the chance to skip one month of your mortgage payments. They might also claim that you could possibly skip two payments, which can be risky, depending on when your refinance closes.
Most mortgage lenders give you a 15-day grace period to submit your monthly mortgage payment, meaning you won’t be charged a late fee — which could be 5% of your payment amount — until after the grace period ends. Once you’re 30 days late, that’s when your late mortgage payment shows up on your credit report and negatively affects your credit score.
Revisiting the example above, let’s say you chose not to make the Oct. 1 payment on your existing mortgage, because you knew your refinance closing was just days away. Since the loan payoff to your existing lender would include that “skipped” October payment, it now appears that you’re skipping two mortgage payments, as the first payment on your new loan still wouldn’t be due until Dec. 1.
The challenge for you is to decide whether that extra skipped mortgage payment is worth your previous lender’s late fee, especially if you close after Oct. 15. John Stearns, a senior mortgage banker with American Fidelity Mortgage Services in the Milwaukee area, said it might be worth the risk for some borrowers.
“Let’s say their mortgage payment is $2,000,” Stearns said. “They can send in two grand and avoid the late fee or they can just eat the $100 late fee (and) keep two grand.”
“It’s just a question of: Is a $100 late fee — or whatever it is — is that a big deal?” Stearns asked. “If people are in a cash crunch, then they’d rather hang on to their $2,000 mortgage payment and not worry about the $100.”
‘Skipping’ a mortgage payment vs. mortgage forbearance
It may feel like you’re skipping a mortgage payment after refinancing your home loan, but we’ve established that’s not really the case. Your old lender is paid what’s owed in your mortgage payoff amount, and your new lender gets prepaid interest at closing to cover the day your new loan is funded until the end of the month.
Truly skipped mortgage payments are actually reserved for borrowers who may need short-term relief. You can defer your mortgage payment in an arrangement known as forbearance.
Mortgage forbearance is a type of foreclosure prevention through which your mortgage lender agrees to temporarily reduce or suspend your monthly mortgage payments to give you time to get back on stable financial footing.
Depending on the circumstances, a forbearance period may last up to 12 months. After it ends, you’ll need to bring your mortgage current by paying what’s owed in a lump sum or through a repayment plan. You may also qualify for a loan modification.
4 tips for finding the best mortgage refinance offer
If you’re ready to get a better mortgage product by refinancing, keep the following tips in mind to get the best offer for your situation.
Check with your current mortgage lender. Start by getting a quote from your existing mortgage lender. That quote can serve as a baseline before you gather others. Remember, you can save thousands by shopping around for a mortgage. Recent LendingTree research shows that someone who got a mortgage rate that was 1.03% lower than their competition saved nearly $50,000 in interest on a $300,000 loan over the course of 30 years.
Ask for lender referrals. Reach out to family, friends and colleagues for mortgage lender recommendations. Check lender reviews. You can also compare refinance offers online to identify the best offer possible. Remember to factor in the interest rate, annual percentage rate and closing costs. Here are more tips to help you choose the right mortgage lender.
Find your break-even point. Take a look at how long you plan on staying in the property. Although refinancing can give you a lower interest rate and smaller monthly payment, there are refinancing costs that might offset those savings. If it costs you several thousand dollars to refinance your mortgage, it might not make sense to go through with the transaction if you plan on moving next year. Be sure you’ll stay in your home longer than the amount of time it will take you to recoup what it costs you to refinance.
Ask your lender about premium pricing. If you’d rather not pay closing costs, consider asking your lender to premium price the loan, which means you take a higher rate. In exchange, the lender makes more profit and gives you that profit in the form of a lender credit to offset the closing costs. The rate on paper won’t look as pretty, but now you don’t have to worry as much about your break-even point — your savings become true savings.
The bottom line
When you’re preparing for a mortgage refinance and are led to believe that you’re skipping your next mortgage payment, remember the nuances behind that assumption. Although the money isn’t coming directly out of your bank account on the first of the month after you close, you’ll make that payment later.