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Refinancing your mortgage? Fine, but time it right

When you refinance your mortgage with another lender, you almost always pay at least a day or two of overlapping interest on both loans. No one is cheating you; it's simply the way the system works. Lenders try to shorten the period that you pay overlapping interest. They boil their policy down to one phrase: Don't fund on Fridays. There's more to it than that, though.

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"This is a relatively simple issue," says Dick Lepre, a loan officer at RPM Mortgage in San Francisco. Then he digs into a complex explanation about why you should make sure your refinancing transaction is funded early in the week and not just before a holiday.

"You have to look at it from the point of view of your old lender and your new lender," Lepre says: Both lenders are entitled to earn interest from the day they lend the money until the day they receive final payment.

In a refinancing transaction, the new lender funds the loan by wiring money to the bank of the escrow agent or attorney who is responsible for disbursing the money. As soon as the new lender sends that money, the clock starts ticking and you pay interest.

The old lender doesn't get the payoff money immediately. Some states, including California, have "good funds" laws that require the escrow agent to sit on the money overnight. There might be paperwork to fill out at the title company and at the county recorder's office.

And, customarily, the escrow agent pays off the old loan by sending a cashier's check by overnight courier. The courier is cheaper and less of a hassle than wiring the money.

All the while, you're paying interest on both loans.

Days upon days
In an optimistic scenario, your new lender wires the money to the bank of the escrow agent on Monday. The escrow agent FedExes a cashier's check that day to the old lender, which receives it on Tuesday and stops charging interest. You paid overlapping interest only on Monday. Add another day if your state requires the money to sit in the bank overnight.

What if your loan is funded on a Friday? Perhaps the old lender gets the check on Monday, and you have paid overlapping interest on Friday, Saturday and Sunday.

Whether those two extra days are a big deal depends upon your perspective. If you borrowed $150,000 two years ago at 8.5 percent, you're paying about $33 a day in interest.

Federal law adds another curveball: the three-day right of rescision. When you refinance a first mortgage with a lender other than your original lender, the law gives you three days after closing to change your mind and cancel the transaction. The loan isn't funded until those three days are up, so you don't pay interest on the new loan until the rescission period is over.

The three-day waiting period can really slow things down. If you sign all your refinance papers on Monday, the right of rescission runs Tuesday through Thursday, so the first day that the loan can be funded is Friday. And if you want to limit the period of overlapping interest, you don't want the loan to be funded on Friday.

There are some cases in which you might not mind paying an extra two days of overlapping interest. Maybe you're receiving cash as part of your refinancing deal, and you want the cash quickly. Or maybe your rate lock expires on Friday or over the weekend, making it impractical to wait until Monday.'s corrections policy
-- Posted: Sept. 17, 2003
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