refinance

There's no free lunch when refinancing

Don Taylorq_v2.gifDear Dr. Don,
I am refinancing, and the loan officer told me a payment would be skipped. He said skipping a payment would depend on the closing date and mentioned something about "when the loan funds" and "three-day rescission period." I don't understand why a payment would be skipped. Will you explain how it is that a payment is skipped?
-- Katia Closes

a_v2.gifDear Katia,
Your lender is talking about a two-month gap between your last payment on the old loan and the first payment on the new loan. There's no such thing as a free lunch. You'll either pay the interest expense on the skipped month at closing, or as an increase in the size of the loan.

Because increased closing costs don't help cash flow when skipping the first payment, rolling the month's interest expense into the loan balance is the more likely offer. The Mortgage Professor, Jack Guttentag, has a feature on his Web site ("Should I Skip the First Mortgage Payment?") that illustrates how much the skipped payment can cost in additional interest expense over the loan term.

Conventional mortgages pay interest in arrears. That means the December mortgage payment pays November's interest expense. That's why you don't increase the interest expense on your loan when you take advantage of the grace period when making a mortgage payment.

The ability to cancel the loan contract is the "right of rescission." The Bankrate feature "Rights of rescission" explains this in greater depth. In general, with a refinancing, you have three business days before the loan funds, meaning the money is available, to exercise your right of rescission. It's important to note that not all mortgage loan contracts have the right of rescission.

With a refinancing, remember that your loan balance will be outstanding with either the new or the old lender. You're not repaying the loan, you're restructuring the financing. What you want to minimize is any overlapping days where interest is owed to both lenders.

Read more about refinance.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

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