With so many people refinancing these days, and with the loan process sometimes crossing one or two months’ time, a question we frequently get from those in process is, “Should I keep making my mortgage payment?” The answer is a simple and clear, “Yes!”
But let’s talk about why, because the concept is as simple as it is often misunderstood. In our formative financial years, many of us rented a home or apartment before we made the leap into home ownership. And I’d be willing to be bet that more than a few of us got chased by a landlord about the rent being a few too many days late past first of the month. Herein lies the mortgage payment dilemma when it comes to refinancing. Unlike rent payments, which are due on the first of the month and cover the month ahead, mortgage payments are applied in arrears. This means that you live in the house in August, for example, and you pay for that time (in interest and principal) on September 1.
Now let’s assume you’re refinancing a home and your expected close of escrow is the 10th of August. Let’s also assume that you have not made the mortgage payment on the first of August. Your mortgage has a grace period until the 15th of the month, after which you are assessed a 5% penalty. But back to our closing scenario — the payoff demand on your existing loan, once received by escrow, will include all of the days of interest for July, plus the expected days of interest in August until the close date of the transaction. Your new lender will collect prepaid interest from August 10 through August 31. You will “skip” a September 1 payment altogether (no regular payment with either old or new servicer) and your first payment with the new loan will be due on October 1. Got it? OK, great. But remember, on August 1 and into August AND until escrow closes, you are still responsible for your August payment! If for some reason you don’t close on the 10th and there are delays past the 15th (where you’d incur a penalty) and, heaven forbid, delays past the end of the month where you’d report late to the credit bureaus, the responsibility to have made the August payment falls squarely on you.
The best advice any of us can give on any mortgage transaction is to ALWAYS make your payment if you are unsure of how things will work out or if your lender or closing agent is not responsive or clear on the matter. Until your new loan is funded and closed, you are ALWAYS responsible for making your mortgage payment and the risk of going 30 days late on your home loan is a risk too great to run. Any overpayment, as painful as it might be, is far less damaging than the credit blemish of a missed payment. If you have questions on any scenario, get in touch and we’ll be happy to explain further.
The check is in the mail,
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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