Question: I am refinancing my mortgage loan for the sole purpose of getting a better rate. I am about 15 years away from retiring, and this will allow me to pay my loan off earlier. However, my mortgage broker set me up with a loan amount higher than I expected; by about five thousand dollars. He tells me the extra loan amount is needed to pay my new loan’s prepaid interest and escrow deposits, as well as an upcoming tax bill. Can I avoid increasing my loan amount?
Answer: You can avoid borrowing the extra funds, but will have to pay these expenses yourself at closing. If you can afford it, and your goal is to make progress on your loan balance, I recommend doing so. Your cash flow will only be temporarily tapped.
If you es crowed your tax and insurance payments with your old lender, you will receive a refund of the escrow balance approximately a month after payoff. Call your lender to determine the amount of your current escrow balance. This refund check will reimburse your out of pocket expense to set up your new escrow account, and to pay the upcoming tax bill. Why borrow the money to cover these costs, knowing that you will soon be reimbursed.
If you do chose to borrow this money, just remember to make an increased payment when you receive your escrow refund check. This will bring down the principal balance of your loan.
Similarly, don’t sweat the prepaid interest required with your new loan. Remember that when refinancing, you effectively skip a month’s mortgage payment. For example, if you closed today, your first payment would be December first. While you will front the money to pay the remaining days of October’s interest, you are saving money by not paying a November payment. Again, why borrow the money to temporarily cover these costs.
When refinancing, the amount of your prepaid interest is of little importance. Closing at the beginning of the month results in a high prepaid interest figure, but your old loan payoff balance is lower. Closing at the end of the month requires only a few days of prepaid interest, but the payoff of your old loan occurs at a later date. This results in a higher payoff balance. Either way, a refinance simply stops your old loan interest payments and starts your new loan payments regardless of the day of the month in which you close.
Attorney James Haroutunian practices real estate law, estate planning and small business formation in Billerica at 630 Boston Road. Contact him with questions at 978-671-0711, hlawoffice.com, prioritylaw.com, or email him at email@example.com.