Fantastic! I am “Skipping” a Mortgage Payment.

by Dave Wirsching on May 18, 2009

Why am I skipping a mortgage payment?  This is a frequent question at the settlement table and one that deserves a detailed answer.

The first mortgage payment on your new loan is typically due the first day of the second month after you have signed the mortgage papers.  For example, your refinance settlement takes place on February 2 with a funding date (click here to learn more about “funding date” )  of February 6.  Your first payment is due on April 1 which will cover principal and interest due from March 1 through March 31. Your second payment is due on May 1 which will cover the period from April 1 through April 30.

Paying your mortgage is the opposite of renting:  You live there first and then you pay.  This is called paying interest in arrears.  And this is a good thing because after all, you wouldn’t want to be chasing after your mortgage lender to get your money back once you have paid-off the loan.

Traditionally, at the time of a refinance, you will be free from making one mortgage payment.  But be careful, don’t mistake this for the mortgage money being free for a month because nothing is free. Or,  possibly, you will skip two months, or if you are short on cash-to-close, you just might not skip a payment at all.  These last two scenarios are not as common as skipping one month’s payment but it can happen when the stars align … no, actually it has to do with the last mortgage payment made, your closing date, and your funding date.

About Interest:

Keep in mind that you owe your new lender interest on the new loan the day your transaction funds.  At the time of the refinance, you owe the “new” lender interest on your new mortgage loan from 2/6 (funding date) through the end of February at the rate of $25 per day (per diem) or $555 (23 days of interest (2/6-2/28) at $25 per day). This rate is deterimed by multiplying your new loan amount by the new interest rate and dividing by 360 or 365 days – lenders choice on the number of days it uses to determine the per diem rate. Note:  when purchasing, the date of settlement is your funding date. (click here for more information on “per diem”).

So, back to the answer, if you are still with me:

Skipping one month:  You sign on February 2, the funding date is February 6.  Your first mortgage payment is due April 1.  You made your February payment to your “old” lender and you will not make a March payment  – one month skipped.

Skipping two months:  You sign on February 2, the funding date is February 6.  Your first mortgage payment is due April 1.  You have not made your February payment, which means you owe your “old” lender interest from January 1 through the payoff posting date and this interest will be included on the payoff statement. You will not make a March payment to your “old”  or “new” lender – two months skipped.  (Warning: Results in more cash required from you at closing than under “skipping one month” above)

No payment skipped:  You sign on February 2 , the funding date is February 6 and you have made the February payment to your “old” lender.  In the previous two scenarios, you owe the “new” lender interest on your new mortgage through the end of February; however, you are short on cash to close.  Therefore, instead of the lender charging you $555 for interest due to February 28, it will give to you 5 days worth of interest (2/1 to 2/5) or $125.   This amount will appear as a credit (-$125.00) to you on the Settlement Statement.  Your first payment will be due March 1 (not April 1 ) which will include interest for the entire month of February.  In this case, you are not skipping a payment, you made your February payment to the “old” lender and your first payment is due March 1 to the “new” lender.”

Timing is everything; review your personal finances and cash-on-hand with your mortgage professional before scheduling your real estate closing.

{ 4 comments… read them below or add one }

1 joseph June 9, 2009 at 6:33 am

good advise, thanks!
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2 Julia July 19, 2009 at 7:09 pm

Nice blog! Keep up the good work.

3 Jonathan March 2, 2013 at 9:52 am

I was told by my broker that no lenders will do the “no payment skipped” scenario. Using the scenario above, they will force you to have your first payment due april 1st, rather than march 1st, and you carry interest on the balance of your loan for an additional month, rather than continuing to pay down your loan. Is this correct? Do you know of any specific lenders which allow you to do the “no payment skipped” scenario?

4 Francine D'Elia Wirsching March 2, 2013 at 10:55 am

I would disagree with your broker as it pertains to closing a loan and the first mortgage payment. There are certainly lenders, not all, that will provide an interest credit when the loan funds within the first few days of the month. It is not typically a course of action that the borrower gets to choose. This option traditionally is used when the borrower has little cash to bring to closing. See example in the blog article. It is important to note that if you are referring to paying interest in arrears throughout the life of the loan than yes, I would agree with your broker. I am not aware of any lender where interest on a first mortgage is paid forward. For example, if your loan funds on March 27 your first payment will be May 1. The May 1 payment covers the interest from April 1 through April 30. Conversely, when you payoff your mortgage, and you sell your house on April 4 and have not made your April mortgage payment, you will owe interest on the loan from March 1 through April 4 plus a few days for getting the payoff to the lender. Hope this helps! Thank you for your post. Francine

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