Refinancing may delay your first mortgage payment, but that usually does not mean you get to skip one. In most cases, interest is still collected through the payoff of your old loan and through prepaid interest collected at closing on the new loan. Because mortgage payments are made in arrears, the first full payment on the new loan often is not due until the following month after the next full month has passed.
When signing closing documents, borrowers will find the date of their first payment in the promissory note and the first payment letter documents. If the closing is on the second of February, for example, monies are not disbursed for three business days. If the second falls on Monday then funds go out on Friday, the sixth. This three-day interval is the recission period granted to refinance borrowers by the federal Truth in Lending Act of 1968. This allows borrowers time to review the documents and terms with loan officers, attorneys and financial advisors. They can cancel the mortgage during this time if they choose to do so. This is important because, in a refinance, the disbursement date determines the first payment date.
Using the example above, the loan closes on the 2nd of February and disburses on the 6th. The first payment, then, is scheduled for April 1st. Why? What about March 1st? Is the borrower skipping a payment here? No. For one thing, he or she pre-pays at closing all interest charged between February 6th through the 28th (or 29th). Still, what about the full payment of principal, interest, along with tax and insurance escrows? It seems like the borrower gets a pass for the month of March. Yet “seems” is all it does. If a refinance customer takes a 30-year mortgage — i.e. 360 monthly payments — then that same borrower is obligated to make 360 monthly payments, not 359.
Borrowers often receive an amortization schedule among the many documents they sign at settlement. This form lists every single payment to be made over the life of the loan. It breaks down each remittance, as well, showing the ratio of interest to principal for each payment. For a 30-year mortgage it will represent 360 payments. Unless a homeowner pays the loan off through subsequent refinance — or prepays the loan by making augmented reimbursements to the lender — each and every payment is required and expected. This begs the question, however. Why does more than a month elapse before the first payment.
When a homeowner closes on February 2nd and the loan disburses on the 6th, the new loan is used to pay off the old one. Prior to the closing, the settlement agent has up-to-date payoff instructions from the lender. In addition to the outstanding balance, these directions show how much is owed in interest from February 1st through the sixth. The prepaid interest collected at closing covers the new loan’s interest charges from the 7th to the 28th. This means that all interest owed in February gets paid in February. Again, what about March?
Not immediately evident is the fact that mortgage interest is paid down in arrears. That April 1st date for first payment is the day the borrower pays for March — the first full month of the new loan. May 1st then pays for April, and so on, and so on until the loan is paid in full. Unlike an apartment renter, who pays the landlord for the ensuing month, the mortgagor pays for the month just completed. So, after meeting all of the interest charges due at closing, homeowners owe nothing on their refinance until after the next full month elapses.
One caveat, though: Should the refinance proceeds disburse on the 1st of the month, then the first payment is due on the first day of the very next month, e.g. funds available on February 1st and payment made on March 1st because no prepaid interest is due at closing. Either way — through prepaid collection or monthly receipts — the lender will get all the interest owed.
Adding extra funds to what is due each month according to the terms of the loan will, of course, re-adjust the amortization schedule. Consistently doing so, month after month, will result in paying the loan down faster. Unless, however, the terms of the promissory note specifically allow for refraining from remittances in lieu of overpayment, borrowers are obliged to continue making their payments as scheduled. Most mortgage servicing is highly computerized. The algorithms that govern servicing operations will in fact reflect the surplus payments of previous months. They do not, however, factor them into current billing. Paying the loan off early does, nevertheless, spare an eager borrower payments at the back end of the loan.
Not in the same sense discussed above. Forbearance is a hardship-relief arrangement, while refinance “skipping a payment” usually refers only to the timing of the first payment on the new loan. Under a forbearance agreement, a lender may reduce or suspend payments temporarily as part of a plan to bring the borrower current later. It does not erase the debt, and it is separate from how refinance payoff interest, prepaid interest, and payment timing work.
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Usually no. Refinancing may delay the due date of your first payment on the new loan, but that does not normally mean a payment disappears. Interest is typically collected through the payoff of the old loan and through prepaid interest at closing on the new loan.
Mortgage payments are paid in arrears, meaning each payment covers the month that just ended. After a refinance, the first full payment on the new loan is often due after the next full month has passed.
The closing date is when the borrower signs the refinance documents. The disbursement date is when the new loan funds are actually released and used to pay off the old loan. In a refinance, the disbursement date helps determine when the first payment on the new loan is due.
In the example discussed, funds are disbursed three business days after closing because of the rescission period that applies to many refinance transactions. That waiting period can affect the first payment date.
The disbursement date is the date the refinance proceeds become available and the old mortgage is paid off. It matters because prepaid interest on the new loan is based on that date, and the first payment schedule is built from it.
Prepaid interest is the interest collected at closing for the days between the new loan’s disbursement date and the end of that month. It covers the new loan’s interest charges before the first regular monthly payment comes due.
Yes. Prepaid interest generally depends on how many days remain in the month after the new loan disburses. If fewer days remain, the prepaid interest collected at closing is usually lower.
The article explains that refinance borrowers are commonly given a three-business-day rescission period under the federal Truth in Lending Act. That period allows time to review the loan terms and cancel if desired, and it affects when funds are disbursed.
Not usually. Paying extra principal can shorten the life of the loan by changing the amortization outcome over time, but it does not normally let a borrower stop making scheduled monthly payments unless the promissory note specifically allows it.
No. Forbearance is a hardship-relief arrangement in which a lender may temporarily reduce or suspend payments as part of a plan to bring the loan current later. It is separate from the timing of the first payment after a refinance and does not erase the debt.
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