Why You Don’t Actually Skip a Mortgage Payment When Refinancing
Refinancing can accomplish a variety of positive things. It can help you lower your interest rate, reduce your monthly payment, and/or pay less money over the remainder of your mortgage. If you can also skip a payment when refinancing, that might seem like the cherry on top of the cake the little extra that sweetens the deal. But is that little extra really so sweet, or does it sour in the long run?
Some mortgage lenders like to use the notion that you can skip a payment when refinancing as a sales tool, but don’t be fooled into thinking you are getting something for nothing. Depending on your circumstances, you may well choose to skip a payment when refinancing, but if you do, make sure you are fully aware of the consequences.
Why You Can Appear to Skip a Payment
The sales come-on “skip a payment when refinancing” is not a lie consumers often can go a month without making a mortgage payment when they refinance. It’s all a matter of timing.
Suppose your current mortgage payments are due by the 5th of the month. Just before the 5th, though, your refinance loan closes. Refinancing pays your old loan off in full so you no longer have a payment due. Meanwhile, the first payment on the new loan isn’t due until the 5th of the next month. So, under circumstances like these, you will have gone a month without making a mortgage payment.
Where that Missing Payment Shows Up
If you skip a mortgage payment in the manner described above, it is not as if your new mortgage company is giving you a break and essentially giving you one month’s mortgage payment for free. The money you would have paid is tacked onto the loan balance, and since your payments start a month later, they will also eventually end a month later. That missing payment essentially shows up on the back end of the loan.
What this means is that you are not skipping a payment so much as delaying it until the end of the loan. You don’t pay any less principal on the loan, and you will pay more interest because that delayed payment will spend many more years accruing interest.
Gauging the Impact
If you want to gauge the impact of skipping a mortgage payment in your refinancing month, it helps to compare amortization tables. Amortization tables lay out the monthly principal and interest payments you will make over the life of the loan, and show the totals for each when repayment is completed.
Ask your lender to run amortization tables on your new loan two ways: one with the first mortgage payment being made at the start of the month in which you refinance, and one with the first mortgage payment occurring at the beginning of the next month. The latter reflects the situation in which you skip the payment in the refinancing month.
What you should see is that over the life of the loan, the total principal amounts to be paid are the same. However, the total interest payments will be higher in the “skip a payment” scenario, since you will take longer to repay the loan in full.
To Skip or Not to Skip?
So, it can cost you to skip a payment when refinancing, but does that mean it is a bad idea? Not necessarily.
To decide whether or not you should skip a payment, think about your primary reason for refinancing. If you are trying to reduce your total interest costs by lowering your interest rate or perhaps by shortening the remaining term of your mortgage, then skipping a payment is a bad idea because it adds more interest in the long run.
On the other hand, if you have been struggling to make your monthly payments and are refinancing to make those payments more manageable, skipping a payment might give your budget some much-needed breathing room. This could come in handy with helping you get over the hump of any closing costs associated with refinancing.
Either way though, the point is not to be taken in by advertising jargon. Skipping a payment does not mean you are getting away with one less payment. It essentially means delaying that payment, at a cost. It is an option that might make sense to you, but you can only make an informed decision if you know what that cost is.