When you finalize your mortgage refinance, you might be surprised to find out that you don’t need to make your next scheduled loan payment. You don’t skip out on paying the amount, but your payment due date will shift off schedule in the refinancing process.
Here’s what happens when you refinance and “skip” a mortgage payment.
What Is a Mortgage Refinance?
When you refinance a mortgage, you replace the original loan with a new one, typically to get a lower interest rate or monthly payment. Homeowners also might want to shorten their loan term to reduce the interest they pay or to switch from an adjustable-rate mortgage to a fixed-rate loan for predictable payments.
You can refinance with your current lender or a new one, but first compare rates with at least a few lenders to make sure you’re getting the best deal. Also, tally your savings to confirm that they will offset your refinancing costs before you proceed.
Do You Skip a Month When You Refinance?
You won’t skip a monthly payment when you refinance, even though you might think you are. When you refinance, you typically don’t make a mortgage payment on the first of the month immediately after closing. Your first payment is due the next month.
Here’s what you can expect:
In a refinance, your original loan is paid off at closing. If you close July 15, you will have already made your July mortgage payment.
At closing, the original lender will retain payment for principal and interest charges through July 15. Your new loan will cover costs starting July 16, but because you don’t make a mortgage payment on the first of the month after closing, your next payment won’t be due until Sept. 1.
“You’re not skipping a month,” says Tammie Barrett, vice president and director of residential lending at Industrial Bank of Washington, D.C. “Technically, your first payment isn’t due until about 45 days from closing.”
Should You Skip a Mortgage Payment?
You can skip a mortgage payment when refinancing and go two months without one, but this can be a risky move.
If your mortgage is due on the first of the month but has a late-fee grace period until the 15th, then you might skip the payment, pay the late fee and pocket the money.
You would simply pay the lender at closing to cover this amount, plus fees. Barrett says she does not favor this idea because the title company might not be able to pay off the original loan if the payoff amount changes unexpectedly.
“It’s always been advisable that you don’t want to incur any late fees,” she says. “You want a clean break from one loan to the next loan.”
Another risk is that closing will be delayed more than a month and you will have more than one past-due payment.
“You’re running the risk of a report to the credit bureau that the mortgage loan is past due,” says Robert Barnes, president and CEO of International Bank of Commerce in Austin, Texas.
A home loan is likely the most important one you have, and every payment must be made on time, Barnes says.
The hit to your credit score for a past-due mortgage is “far greater than any other delinquent payment. It can materially affect your credit score,” he says.
When Can You Expect to Close?
You probably won’t be able to pick your closing date when you refinance, and you could wait for up to two months, or possibly longer, to get to the closing table.
A refinance surge fueled by low interest rates makes it difficult for lenders to pinpoint a closing date. As a result, selecting a closing date that works well for homeowners has become next to impossible.
“Right now, borrowers don’t really have that as an option because the backlog of loans is just so heavy, so loans are closing when they can,” Barrett says.
Also, purchases take priority over refinances because a series of contractual deadlines have to be met, she says. This adds more uncertainty about the closing timeline for refinances, which makes staying up to date on mortgage payments even more important for homeowners.
Adds Barnes: “You are dealing with an environment where you really cannot predict that closing date.”
Communicate openly with lenders about the likely timing for refinancing when you apply.
“We’re telling our customers for refinance and purchase that we need at least 45 to 60 days to close either loan,” Barnes says. “If they don’t have the ability to wait that long, we won’t be able to entertain the application because of the high volumes we’re dealing with.”
Why Escrow Refunds Can Help Cash Flow
Any unused funds in your old escrow account will be returned to you after your new loan closes. This can be helpful if money is tight after paying for closing, including setting up a new escrow to cover insurance costs and taxes on your new loan.
You should receive funds from the original escrow, if there are any, within 30 days of closing. That cash could go into your new loan, or you could spend it to furnish or fix up your home or use it to pay off debt.
When You Can’t Refinance
You might struggle to pay your mortgage but cannot qualify to refinance your loan. In that case, check with your lender about forbearance options, which have become more widely available because of the coronavirus economic crisis.
“Banks have been given liberal terms to grant forbearance during the pandemic, allowing homeowners to temporarily postpone mortgage payments,” Barnes says.
Most lenders are following guidelines established by Fannie Mae, he says. The borrower only needs to report a hardship.
“We don’t ask any questions, and there is no requirement to prove or document the hardship,” Barnes says.
Banks typically grant 90 days of forbearance, which can be extended. Under the CARES Act, homeowners with loans backed by Fannie Mae or Freddie Mac can ask for an initial forbearance of 180 days, plus a 180-day extension if necessary. Federally backed mortgages may have a Feb. 28 deadline for requesting an initial forbearance.
“Seeking forbearance does not affect an individual’s credit score, at least not during the coronavirus pandemic,” Barnes says. “In fact, banks do not report that a customer has sought forbearance to the credit rating agencies.”