Many times a homeowner will calculate the amount needed on a refinance based upon their current mortgage balance plus costs involved. The one calculation most borrowers miss is the accrual of interim interest on the old mortgage. Many times a borrower will call their current mortgage holder at the beginning of a month to find out the amount of their current principal balance - a payoff.
If they wind up closing on their refinance closer to the end of the month, they may be shocked to learn the amount needed to pay off the old mortgage is greater than the original quote - sometimes close to a full mortgage payment greater.
Sometimes individuals who are refinancing won’t make the mortgage payment that is due just prior to closing on a refinance. So if the closing on a refinance were scheduled for September 15, many borrowers do not make the payment due September 1, since most mortgage payments are not late until the 15th. (by the way - we don't recommend this ) Since that payment would pay interest due for August, they now wind up owing interest for the full month of August and half of September at closing.
This can be an unpleasant surprise at the closing table. In order to avoid this, a good rule of thumb is to expect settlement costs (closing costs plus pre-paid interest and escrows) at the time of closing to be higher than expected by the equivalent of one monthly payment.
Nothing is being paid on principal while the new loan funds and the old loan is paid off by new lender (interest is always paid in arrears.) |
