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Do You Skip a Mortgage Payment When You Refinance?
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It may seem like you skip a payment when you refinance a mortgage, but you actually don’t. That’s because after refinancing, the first payment isn’t due the month after you close — it’s due the following month. For example, if you close on June 12, the refinanced mortgage’s first payment would be due on Aug. 1, not July 1.
Some lenders actively advertise that you can skip a payment when you refinance. But you aren’t actually getting a free month; you’re just getting a month free of mortgage payments. You’ll still owe the money, and you’ll eventually pay it.
Why it appears you skip a mortgage payment when refinancing
At first glance, it can look like free money because you closed on June 12 but don’t owe any money in July. That’s because mortgage payments are made “in arrears,” or for the previous month.
In other words, the June 1 payment you made wasn’t for the month of June, but rather for the month of May. That is, assuming you did make that payment … more on that below. The interest that accrued during the first part of the month will be included in the loan payoff amount sent to your former mortgage lender after your June 12 closing.
THINGS YOU SHOULD KNOW
At closing, you’ll also be charged prepaid interest to cover what’s owed from June 12 to June 30. That’s the reason you don’t make a payment in July, since nothing is owed for June. And again, since mortgage payments are made in arrears, the Aug. 1 payment will cover what’s owed for July.
You didn’t skip a mortgage payment without penalty — you just kicked the can down the road a little.
Risks of ‘skipping’ the last mortgage payment before a refinance
Typically, lenders offer a 15-day grace period after the due date for mortgage payments, which means you wouldn’t be charged a late fee until after that time frame. A late fee is generally 4% to 5% of your payment amount. Once a mortgage payment is 30 days late, it shows up on your credit report and can have a major negative impact on your credit score.
Some people choose not to make a payment during the month they close on a refinance. Using the June 12 closing example, they would deliberately not make their June 1 mortgage payment because they know they’ll be closing before the end of the 15-day grace period.
What if you need quick cash?
Suppose your current mortgage runs you $2,800 per month. Skipping the June payment means it will just be added to the new loan, so you can use those funds to help cover a current cash crisis instead. The fact that you don’t owe a payment until Aug. 1 also gives your budget a little more breathing room.
It’s akin to a cash-out refinance, according to Casey Fleming, a mortgage advisor with Fairway Independent Mortgage in Campbell, Calif. In fact, some people might choose to roll other costs, such as property taxes and fees, into the new loan, along with the skipped payment.
“If taxes are $4,000, that’s another $4,000 [cash] we can give you,” Fleming says.
A homeowner would wind up financing these costs over 20 to 30 years, which means a lot of interest, though less, if the loan is paid off early. But getting money this way would still be cheaper than taking out a cash-out refi, since rates for those are generally higher than rate-and-term refinances — especially if you don’t have excellent credit.
Can you skip two mortgage payments?
Some mortgage lenders advertise the chance to skip not just one, but two months of payments. This can be risky, but it could also help you through a cash crunch. Here’s how skipping two months might work.
Let’s say you close on that refinance before the end of the grace period for late payments. You’ll have skipped out on — so to speak — the June payment, and you won’t owe anything until August. On paper, it looks like you got away without ponying up two months’ worth of mortgage payments for June and July.But you haven’t skipped them; you’ve just postponed them. The June payment will have been included in the loan payoff amount to your former lender. The payment you make to your new lender in August will cover the month of July.
If your refinance closing were to be delayed past the grace period, you might have to make the payment anyway. Delayed closings don’t happen too often, Fleming explains, except under unusual circumstances like the 2020 refi boom. Home refinance loans increased by 149.1% between 2019 and 2020, according to the Consumer Financial Protection Bureau (CFPB).
“The industry was overwhelmed with business; we were working way over capacity,” Fleming says. “We just couldn’t get it done.”
Another potential risk is that homeowners might spend unwisely due to the “extra” money in their budgets. “Hopefully that doesn’t happen, but in reality it does, sometimes,” Fleming says. However, he notes that most people won’t spend recklessly because they “want that cash for a certain purpose.”