Many a loan officer use the phrase “You’ll get to skip a payment” when discussing refinances with potential customers. Sometimes, marketing (non-compliant/illegal marketing, we should add) promotes “skip 2 month’s payments!” as a potential refinance benefit. The reality of “skipping” mortgage payments when refinancing is actually a little more complicated, and a lot less exciting for homeowners than some sales people might leave a consumer believing.

Technically, you don’t pay for a month

When you refinance, some of the fees and payment timelines depend on when your new loan funds. To use a real-life example, if a new mortgage loan funds on December 20, the customer getting the mortgage loan would not see a payment due until February 1. Since the mortgage the new loan is replacing is paid off when the loan funds (in December) then technically, there is no payment due to anyone for the month of January. This is the “skipped” month a lot of people talk about.

While there’s no payment due in January in the above scenario, nothing is skipped, and there’s no true savings for a homeowner in this example. The reason is simple: mortgage interest is paid in arrears.

So when you make that first payment (continuing to use the example above) in February, the payment is including the interest owed for January (the ‘skipped’ month). When your new loan funds (again, using a December 20 example), part of your closing costs is “per diem” interest thru the end of the month your loan funds – so in this case, December 20 thru December 31. So you pay all of December’s interest, and all of January’s interest with your February payment.

And What About Skipping 2 Months Mortgage Payments?

Again, consumers don’t truly skip payments because with a refinance, there’s never a month where the mortgage loan servicer doesn’t collect interest. BUT, you can technically arrange a mortgage closing to avoid making payments for 2 months without any late fees. This is due, again, to the aforementioned “per diem” interest.

Most mortgages have a 15 day grace period, so homeowners can make their payments any time between the 1st and 15th of the month without late fee charges (this is general guidance, check with your servicer/your loan note for details specific to your loan). So if a new loan funds in the beginning of the month (for this example, let’s use a December 10 closing date), the existing mortgage is paid off before a late fee is charged – if a customer didn’t make their payment when the loan is paid off, there is no penalty or repercussion. In this example, the customer still wouldn’t see a payment due until February 1. So voila, you make no January payment, and you didn’t make a December payment, so you skipped 2 months, right!?

Wrong – again, because of “per diem” interest, your closing costs would include interest from December 10 thru December 31. And November’s interest would be included in the payoff figures from the lender for the loan being paid off. So again, there is no interest not being paid, and nothing is truly being “skipped”, although it IS true from a cash flow and monthly expense perspective, you can go 2 full months without actually making a monthly payment.

Does It Make Sense To Put Off Payments?

From a long term financial perspective, many customers include all their closing costs into a new loan – so that “per diem” interest gets included in the financed loan amount (this is why “per diem” is one of the costs that gets calculated into an APR) and paid over the loan term, with interest. So it becomes more expensive than if closing costs were paid out of pocket, or if a new loan is scheduled to close toward the end of the month to reduce total per diem interest.

That said, from a cash flow perspective, some people enjoy the relief of not having to make a monthly payment for a month or 2. So the answer is, as we see so often…it depends on what’s most important to you.

So Do I “Skip” A Payment Or Not?

You’ll never truly SKIP a payment, but your loan officer can help you structure your new loan depending on what makes the most sense for you – if you could use some relief from monthly payments for a month or 2, you can structure your new loan to accommodate that – you’ll still be paying interest, but how and when that interest is paid can be changed.

If you want to maximize the long-term financial benefits of your new loan, it’s best to start paying on your new loan as soon as possible and to keep the new loan balance as low as you can. So while that might mean your payments on the new loan start sooner, long term, it saves you some money since you’re financing less interest over time.

Your best bet is to work with a loan officer that can walk you through your options and the various ways your loan can be structured to help determine what’s best for you. Need a great loan officer? You’re in luck, because we’ve got them here at Catalyst! Give us a call, or send your questions over here to get a quick response!