One of the benefits that many homeowners like about refinancing their home loan is the ability to “skip” a mortgage payment or two during the refinance process. Because of how the timing works out, you are essentially skipping mortgage payments for one month. Sometimes, it allows you to skip two payments!
The question is if this is really the case. Are you really skipping mortgage payments? Is it really a benefit to you to skip payments? These are the questions we hope to shed light on in today’s article.
But First….Common Cents: The obvious benefit is the cash flow you save by NOT making the payment. And in our experience, the key to evaluating this decision is all about…. where does that cash go? If it goes into anything that has a higher ROR than the cost of mortgage interest, then it pays off financially. Or, if it goes somewhere that helps you sleep at night, then great! But if it goes to something that doesn’t provide real value, then of course it is not recommended.
How it Really Works
First of all, you aren’t technically skipping a payment or saving any money long-term. You may have to pay some interest or late fees depending on the timing of things, but any amount you pay during that first month of the refinanced loan will definitely be much lower than your standard full mortgage payment. So, yes, you will save a little cash out of pocket during that first month or two after the mortgage refinance has been processed and funded. That is a nice little benefit of refinancing a home, in addition to the primary benefits of lowering your monthly payment and/or shortening the length of your new mortgage.
It’s important to remember that mortgage interest is paid in arrears. When you are making a mortgage payment, it is for the previous month not the upcoming month. This is why you essentially skip a payment or two after a refinance. The new loan resets and then you pay after the first full month is complete. That lag time between loans is what amounts to skipping a payment or two—or making only a partial payment. You get to keep a little cash in your pocket if you want.
Can I Skip Two Mortgage Payments?
It is possible to skip up to two mortgage payments to help the immediate cash benefit to the borrower. This can happen if the transaction is complete before the standard 15-day grace period and the borrower does not have to pay a late fee. If the loan funds after the 15-day grace period, the borrower will have to pay a late fee. However, the late fee will be significantly less than a full mortgage payment.
So, it sounds great you’ll be able to skip a mortgage payment or two and keep a little extra cash in your account when refinancing your home loan. This is true and many borrowers appreciate this extra perk of a refinance.
The Pros and Cons of Skipping Payments
Now, the question becomes: Should you keep that cash in your pocket or not? Though you are skipping mortgage payments, you aren’t actually saving any money over the length of the loan. The principal is the same and plenty of interest will be collected along the way. It’s also important to remember that the interest-to-principal amounts will be greater in the earliest payments of a mortgage loan compared to later payments. All home loans are weighted with more interest due upfront.
Therefore, you can keep that skipped payment money in your pocket or you could make a higher first payment or two when the refinanced new loan starts. You can apply these funds directly to the principal and this will save you over time if you are able to pay off your loan faster. Any time you can contribute a little extra toward your principal, you are doing yourself a favor in the long run. In a refinance situation, not skipping a second mortgage payment may also help prevent some annoying calls from your mortgage servicer, as well!
To sum up, you aren’t necessarily skipping a payment when refinancing a loan, but you are delaying it and you may be able to delay two payments if the timing works out right with your refinance. Ultimately, you have to decide if you want to keep that money, use it for something else or reapply it to your principal on the new loan. Some borrowers don’t need that immediate cash benefit, and that money can be put back to good use toward the refinanced mortgage loan.
If you have questions about the home refinancing process or would like to get started with refinancing your home loan with today’s great interest rates, contact Transparent Mortgage today at (619) 701-3906.