Do you really skip a mortgage payment when you refinance?

The answer is yes and no. Allow us to explain.

When you complete a mortgage refinance transaction, you typically don’t have a payment due for one to two months. So in this sense, yes, you skip a payment.

The reason you don’t skip a payment, in another sense, is because the interest that accrues under the new loan between the funding date of the refinance and the first payment due is accounted for in your closing costs as “pro-rated interest.” This is typically added to your mortgage balance, unless you pay the costs in cash. The old saying, “There is no free lunch,” holds true here, as well.

While it does feel like you’re skipping out on payment, the costs still exist.

In addition to skipping a payment or two when you refinance, if you’re paying off a loan that has an escrow account (and using a new lender), you’ll receive the balance of the escrow account, which will be refunded to you within 30-60 days of closing. If the new loan has an escrow account as well, the funds to establish that account will also be a part of the closing costs, so the money you receive as a refund does not have to be sent to the new mortgage company.

For these reasons, many borrowers choose to refinance in December, as this is a month where the break in payments and escrow refunds are most appreciated. I would never encourage someone to refinance a home for these reasons alone, as each transaction must make financial sense. However, it’s a nice bonus after the holiday season.

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