Photo provided courtesy of AAG.com
Skipping 1 or 2 mortgage payments is an added benefit of refinancing. The additional cash can be a welcome contribution to your savings funds, retirement, etc. But the reasons and processes for skipping several mortgage payments is often misunderstood, so Evergreen Mortgage is here to dissipate the mists of darkness surrounding this concept.
Quick Key Concepts
In order to understand how skipping payments is possible, it’s first important to understood a couple of fundamental concepts/definitions:
· Mortgage payment cycle: When you make your mortgage payment (normally due on the first of the month), you are actually paying the previous month’s interest. The interest included in your September 1st payment is actually the interest accrued on your loan during the month of August (that’s just how amortization works). You also have until the 15th of the month to pay it without accruing any fees, and you have until the last day of the month to make your payment without incurring a 30-day late (which is bad).
· The mortgage Payoff: When you refinance, the new lender requests a “payoff” statement from your current lender. This payoff amount is what is required to satisfy the loan completely. It is usually higher than the remaining balance that shows up on your statement because it includes the interest for any payments not yet made. For example, if a payoff statement is generated on September 5th, and you haven’t made your September 1st payment yet, the payoff will include your remaining mortgage balance plus your interest for August and the interest for September, up to 9/5/16. In fact, so that the new lender doesn’t have to keep ordering new payoff statements, the payoff will normally include additional days of interest so that it is still good through the estimated closing date. So, to continue our example, if the lender estimates that the loan will close at the end of September, the payoff might include August’s interest plus 25-30 days of additional interest. If you end up making your September payment before the loan closes, then the lender can request an updated payoff (which will be lower) or you will just get a refund when the loan closes.
Skipping One Payment
Skipping one payment is easy and actually hard to avoid. Lenders have to let a full calendar month pass before they can collect interest for that month. So, if you close your loan on September 15th, the next full calendar month is October, so your next payment won’t be due until 11/1/16. You end up skipping a mortgage payment for the month of October.
Skipping Two Payments
Skipping an additional payment is simple as well, but requires a bit more attention. To do so, you use the rules for calculating the payoff (described above) to your advantage: since the payoff includes the interest that would have paid anyway with the payment that is due in the month that you close, you don’t have to make that payment. So, in our previous example, if the borrower that closed on 9/15/16 hadn’t yet made their September payment, they wouldn’t need to, because it was already accounted for in the payoff. The borrower ends up skipping their September payment as well as their October payment.
Let’s round out the example:
Cautions and Clarifications
Note that if- in skipping 2 payments- you don’t make your payment by the 15th in the month that you close, that late payment fee may be added to your payoff (some lenders add it, some don’t care because they know you are refinancing). What’s more important is that you make sure that you are not 30 days’ late on a payment as that could derail the entire refinance. If you intend to skip 2 payments, have the monthly payment set aside just in case there are delays that push the closing to the next month. Such a delay would still allow you to skip 2 payments, but you just have to make sure that you don’t go 30 days’ late.
Also, understand that skipping payments does not imply that the money is free. You are always paying for all of the days of interest owed, they are just being added to the loan. If you opted to keep making monthly payments, your loan would just be smaller.
