Here are the Pro’s and Con’s of skipping 2 Mortgage Payments on a Refinance
When considering refinancing your mortgage, you’ve probably come across advertisements or mailers boasting the ability to skip two payments. This offer can sound enticing, but understanding the details and implications is crucial. In this blog post, we’ll break down how skipping two mortgage payments works during a refinance, exploring the pros and cons of this approach.
The Reality of Skipping Payments
Firstly, it’s important to understand that you do not actually get to skip paying the interest on your mortgage. While it may feel like you’re skipping payments because you are not mailing out the payments for a couple of months, the interest still accrues and has to be paid.
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How to Skip 2 Payments on a Mortgage Refinance
Refinancing your mortgage can be a smart financial move, but the concept of skipping payments can be a bit misleading. Kevin Retscher, owner of First Meridian Mortgage, breaks down the process in a way that’s easy to understand. Here’s everything you need to know about skipping one or two mortgage payments when refinancing.
The Reality Behind Skipping Payments
When literature or promotions claim you can skip payments during a refinance, it sounds appealing, but the reality is more complex. Truth is your really bringing the payments to the closing table on the day of closing. Here’s a look at how you can manage this process and the financial implications: Pro’s and Con’s
Understanding Interest Payments
When you make your September mortgage payment, you’re actually paying for the interest accrued in August. Your principal balance might stand at $200,000, and let’s assume that closing costs of the refinance are $3,000, with an additional $2,500 for escrow startup.
Scenario One: Skipping One Payment
If you close on the 15th of a month and your last payment was on September 1st:
- You owe 15 days of interest to the old lender amounting to $1,000.
- This makes the total payoff to
Your new loan also requires prepaid interest for 15 days, another $1,000.
- Adding the closing costs and escrows, your total obligation comes to $207,500.
Now, you have two choices:
- Bring Money to the Table: Bring $7,500 to the closing and finance only $200,000. The first payment is due on November 1, and you’ll receive your escrow refund from the old lender within 30 days.
- No Out-of-Pocket: Finance the whole $207,500, which means you’re skipping a payment but rolling $7,500 into the new loan. This option involves essentially taking $4,500 out (the difference between the total amount rolled into the loan and the money you receive back from the old escrow).
Scenario Two: Skipping Two Payments
The process for skipping two payments starts by not making your regular payment and closing earlier in the month, say on the 10th:
- You now owe 40 days of interest to the old lender ($2,700), making your total payoff $202,700.
- You also need to prepay interest to the new lender, and with closing costs and escrows, your total spins up to $209,500.
Again, your options are:
- Finance Everything: By rolling everything into the new loan, you finance $209,500, effectively skipping two payments. Your first payment would be in December, and you would get back your escrow from the old lender, making it a no out-of-pocket deal but increasing your principal.
- Partial Out-of-Pocket: Bring $6,500 to the table, finance $203,000, skip two payments, and get your escrow back. This option is more cash flow neutral, limiting the increase in your principal balance.
Important Considerations
No matter which scenario you choose, remember:
- Interest is Accrued: Whether you bring money to the table or roll it into the loan, you’re simply changing the timeline of your payments, not eliminating them.
- Evaluate Closing Costs: Different lenders offer various credits or have different fees. Always ask for a detailed breakdown of costs.
- Cash Flow vs. Principal: Your financial situation will dictate whether bringing money to the table or rolling it into your loan makes more sense. Balancing immediate cash flow needs with long-term financial health is critical.
Conclusion
In conclusion, while the idea of skipping mortgage payments during a refinance can be alluring, it’s essential to understand the details and implications fully. Make sure your loan officer explains all the factors involved so you can make an informed decision that’s best for your financial situation.
For more detailed information and personalized advice, contact Kevin Retcher at First Meridian Mortgage at 703-799-5626. Semper Fi to all the Marines out there!