Skip Your Mortgage Payment Instead Of Skipping The Holidays
They say there’s no place like home for the holidays. There’s also no time like the holidays to rack up major credit card expenses that will make you wince once it’s time to pay them off in January.
However, there’s one strategy you can pursue: consider refinancing your mortgage now, which may allow you to skip your mortgage payment — or even two months of mortgage payments — between January and March.
Some Really Big Fine Print — Read Before You Refi
First, a disclaimer — you do not actually skip your payment.
Repeat — you do not actually skip your payment.
What you do is time the refinance to delay your payment — but there’s no “missed payment” hit to your credit score, and it can give you some breathing room.
Here’s how it works.
Skipping 1 Month
When mortgage borrowers refinance, they usually get to avoid writing at least one monthly mortgage check.
That’s because when you refinance, the interest due (which you’d normally pay each month), is just added to your payoff.
In addition, the interest through the end of the month in which you refinance (this is called “pre-paid interest”) is also added to your new loan balance.
If, for example, you closed your refinance on January 10th, 2017, your first mortgage payment on the new loan isn’t due until March — you won’t need to make a payment for February.
So you can see from this example that no one’s avoiding paying what’s owed. It’s just that the way the payment dates are set can give you one month in which you don’t have to worry about writing that mortgage check.
Skipping 2 Months
Depending on the timing of your refinance closing date, you may even be able to buy yourself two payment-free months instead of one, which might allow you to enjoy the season a little more.
Here’s how: first, close your refinance on the 15th of the month (or the nearest business day possible to that day). If you close after the 15th of the month, the scheme is derailed.
The reasoning behind this is that the typical grace period for paying a mortgage is 15 days. If you close your mortgage on January 15th, you would not make your normal January 1 mortgage payment.
Instead, the mortgage payment that would be due on January 1 just gets added to your new loan balance. And so does the 15 days of interest for January 1 through 15. And so is the pre-paid interest for January 16th through the 31st.
Your first mortgage payment is still due in March, just like the previous example. But you’ll have been able to avoid writing two mortgage checks for January and February.
Margin For Error
Note that there is some risk involved here: the lender of your old loan needs to be paid off by the 15th of the month, or you will be assessed a late fee.
Your new lender has to close the refinance loan on time, before the 15th, and the escrow company must get the payoff money to the new lender in time.
You can reduce this risk by shooting for a slightly earlier closing date — say, the 14th. You can make sure your refinance is pre-approved, your appraisal is completed, and there are no remaining underwriting conditions before you decide to skip your payment and close your mortgage.
The Cash-out Refi Proposition
If the “skip a mortgage payment” strategy makes you a little queasy, or your credit balances are more serious, consider a cash-out refinance. You refinance with a loan that exceeds your current mortgage payoff, and use the extra cash to repay those holiday bills.
If, for instance, your home is worth $250,000, and your current loan balance is $180,000, you could apply for a cash-out refinance of up to $200,000 with most mainstream lenders — giving you a $20,000 holiday cushion.
However, a cash-out refi may not be the smartest option. Refinance closing costs are generally higher for cash-out refinances.
And those higher percentages apply to the entire mortgage, not just the extra cash out. For instance, if your credit score is 700, and you want a cash-out refinance to 80 percent of your home value, there’s an extra 1.125 percent fee for Fannie Mae loans.
For a $200,000 mortgage, that’s $2,500 in extra fees — probably not worth it to clear a $5,000 credit card balance.
Andrew Saltman, principal broker of Carbon Capital in Ponte Vedra Beach, does not recommend a cash-out refi to finance holiday bills.
“I would advise a cash-out refinance only if there was substantial equity, low rates, and lower payments involved,” Saltman says. “For example, cashing out to install a swimming pool that will add value to your home may be worth the consideration.”
A home equity line of credit (HELOC) might be a better solution. It’s a revolving account that works like a credit card, but because it’s backed by your home equity, its interest rates are much lower.
Even better, if you itemize your deductions, the interest is probably tax deductible (check with a tax pro).
“A HELOC today will likely carry a rate below four percent and be a very good and cost-effective way to free up cash from home equity,” notes Joe Parsons, manager of the Dublin, Calif. branch of Caliber Home Loans.
“A borrower can expect to get a line of credit for a total of 80 percent combined loan-to-value, which means that, if your home appraises at $400,000, with a first mortgage of $250,000, you could qualify for a HELOC up to $70,000.”
Keep in mind HELOC interest rates are not fixed and can increase over time.
Mark Ferguson, Realtor and real estate investor in Greeley, Colorado, recommends running the numbers before refinancing.
“Some folks may think it’s a brilliant idea to refinance in order to skip a payment or two, but you are paying a lot of costs when you get a new loan, and that interest still has to be paid.
If it makes sense to refinance because of a lower rate or taking cash out, great. But do not do it simply to skip one or two payments.”