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.

You are refinancing your mortgage loan to take advantage of a lower interest rate and taking a few dollars out of the property in order to make some home improvements.  You have signed the very last paper in the very large stack and now you are ready to walk away with a check.  Not so fast.  If you are refinancing your primary residence, no funds will be disbursed until three business days have elapsed, during which time you are able to cancel your transaction.

For example, if you sign the mortgage documents on Monday, February 2, you will have up until midnight of Thursday to change your mind.  Your loan will fund on Friday, February 6,  absent your not cancelling.  This day is known as the funding date.

You might say:  I am not going to cancel, so why not give me my money today?  Sorry, unless there is an undo hardship (and you would have to prove it to the lender), no money will be disbursed prior to the funding date.  And having to pay for the large screen television being delivered the next day is not a hardship.

It is very important to keep this rule in mind especially when cashing-out.   The title agent cannot change your funding date and your mortgage lender will not release any funds to the title agent until the three day right to cancel period has expired.  This time frame is also known as the rescission period.

All payments being made on the HUD1, including any funds back to you, will be available on February 6.  Your mortgage payoff check will be sent via an overnight carrier for delivery on Monday the 9th.  However, it is standard practice for the title agent to collect an extra day’s interest (some times two days) - to the 10th – just as a cushion.  The lender will return to you any interest paid but not due.

The three-day rule requirement does not apply to investment properties and in most cases to second/vacation homes.

If you are fortunate enough to be able to refinance your mortgage loan into a lower interest rate, you should know how your escrow account with the new and current lender will be handled.  The mechanics of escrow accounts are complicated, and many borrowers want to know: What is escrow, and where does the money go?

Why Do Lenders Hold an Escrow?

Lenders want to make sure that its collateral (your property) is insured and that the taxes are paid on time.  Many lenders require that borrowers establish an escrow account to make sure that these bills are paid.  Lenders may require escrow only for taxes or insurance or for both taxes and insurance. The escrow account is established at the time of settlement, and the funds for establishing the account are shown on the HUD-1 Settlement Statement.   The funds shown on the settlement statement represent the starting balance for the account, and regular contributions to the account are made as part of your payment schedule.  Throughout the year, payments to your insurance carrier, school district and other local taxing authorities are made from the account.

In addition, most lenders require any tax and/or insurance bills due within 60 days of settlement be paid on the HUD1 Settlement Statement.  In most Pennsylvania suburbs, the local and county tax bills are mailed as early as the first week of February with the school tax bills mailed in July.  If you own property in the City of Philadelphia, you will receive one bill only and it is issued in December for the upcoming year.

What Happens to the Current Escrow Account When You Refinance?

As for your existing escrow account, once the mortgage payoff funds are posted, any monies currently being held in escrow with your current lender will be returned to you within 2-4 weeks directly from that lender. The existing escrow account cannot be transferred to the new mortgage lender UNLESS:

• Your current lender is the same as your new lender.  Your payoff will be reduced by your current escrow balance.
• Your current lender is NOT the same as your new lender. But, luckily for you, your current lender does not want to be bothered with sending a check later so it reduces your mortgage payoff by the amount it currently holds in escrow.  Very few lenders will offer this option unless you refinance directly with them.

How much Money Should I Expect to Place In Escrow at Settlement?

In either scenario above, you can expect to place an additional 1-2 months of taxes and insurance into the new escrow account over and above your current escrow balance.  Your situation may look like this: You owe $100,000, your current escrow balance is $1,500, and your current monthly escrow payment is $200.  At settlement, your payoff will be $98,500.  Your new lender will require you to place $1,800 into the new escrow account.  Remember that only $300 of that is new money, the other $1,500 represents the balance in your existing escrow account.

What if you are not refinancing with your current lender and the current lender does not offer an escrow credit on the payoff statement?  In this case, you will have to fund the new escrow account at the time of settlement and then wait to receive a check back from your existing lender.  Keep in mind that it is possible that the monies placed in escrow at settlement will be more than your escrow refund. Two reasons for this are that you are skipping a payment (more about this in my next post) and quite possibly, your current escrow account is not fully funded due to increases in taxes and/or insurance billings, creating an escrow deficit.

Keep in mind that all lenders don’t behave the same but most do, so, you may have a lender that does not fall into the above descriptions.